Spence's Quality-Choosing Monopolist

a. Recall the model of Spence [1975) discussed in class. In that article, Spence does not specify the underlying utility function of individual consumers. Let us now assume that all individual consumers have unit demand, with utility functions given by _ v,- + 33 p, if buys one unit ui _ l 0, if does not buy, where = 73/12 and where 3 denotes the \"quality\" of the good. Given this further structure we have added to the model, discuss the ways in which the privately optimal quality choice may be distorted compared to the socially optimal quality choice. b. Using your imagination/intuition, (i) describe two situations [that is, industries, products, markets, etc.): one in which a firm with market power is likely to offer a product featuring a level of quality that is too low, compared to the level that would be socially optimal given the same amount of output, and another in which a firm with market power is likely to offer a product with a level of quality that is too high