Here is a complex yardstick problem. A monopoly hospital faces the following demand curve 400 10 q p and the following marginal cost (with no fi xed costs)

c =22

(a) Calculate the profi t-maximizing values of p* and q* , the maximized profi t π*, and the consumer surplus CS* .

Suppose that the fi rm could reduce its costs according to the formula R = 40d2 , where d = the original cost (here, 22) – the new (reduced) cost A yardstick regulator assigns the hospital the following parameters:
Lump sum subsidy = 300;
Yardstick price = 20.

(b) Give the profi t-maximizing condition for the yardstick regulation.

(c) Calculate the profi t-maximizing values of p* and q* , cost reduction expense R* , maximized profi t π*, and consumer surplus CS*.