Question 2

There is only one electricity company with the permit to operate in a city. The demand for electricity is given by the following inverse demand function:

P = 12 ( Q^D / 10 )

(a) Write down the marginal revenue of the firm (MR), as a function of Q.

The cost function for the monopoly firm is given by:

C(Q) = 50 + 6Q + ( Q^2 / 10 )

(b) Write down the marginal cost of the firm (MC), as a function of Q.

(c) What is the profit-maximizing quantity for the firm, and what price will it charge for electricity?

(d) What is the socially optimal quantity of electricity that should be produced (Q^B)?

(e) What level of profit would the firm earn if it produced the socially-optimal quantity (Q^B)?