5) A single monopolistic firm provides pick-up of recyclable goods (bottles, cans, paper, etc.) in the city. The
inverse demand for recycling pick-up is P = 50 – Q where Q is in tons of recyclables and P is the price per ton. This implies that the firm’s marginal revenue is Marginal Revenue = 50 – 2Q. The firm’s total costs are Total Cost = 10Q + 1.5Q2 which implies that its marginal cost is Marginal Cost = 10 + 3Q.
a. What are the profit-maximizing price and quantity for the firm?
b. At the profit-maximizing point from part (a), find consumer surplus, producer surplus, and deadweight loss.
c. What would be the price and quantity associated with average-cost regulation, i.e. if you regulated the monopolist to charge at P=AC? How much would recycling increase under Page 2 of 2 P=AC regulation? (Note: the firm is not required to charge a price equal to its average cost from part (a). Instead, the firm must produce the level of output at which the price is equal to its average cost and demand is satisfied.)
d. Why is it problematic to regulate a monopoly using the average cost of production?