Problem 3: Economic Theory of Regulation and Stigler-Peltzman Model. A regulator is to choose the price for corn. The demand for corn is Q = 5 P. Assume for simplicity that cost of producing corn is zero.

(a) According to public interest theory (NPT), what price will the regulator choose?

(b) According to capture theory (CT), what price will the regulator choose?

Now consider economic theory (ET) and the Stigler-Peltzman Model. The regulator's objective is to maximize its political support. Corn producers prefer prices that gives them higher profits, and consumers prefer lower prices. If the price is P and the profit is , the regulator's support is 100 + P.

(c) Calculate the price P that maximizes the regulator's support.

(d) Now assume instead that the regulator's support is 100 + 2P. Calculate the price P that maximizes the regulator's support.

(e) Draw a graph that illustrates the above problems and their solutions.