Suppose the demand function of a good produced by an unregulated monopoly is QD = 24 -2P and the cost function is C (Q) = 2 + 3Q + Q2.
a. What is the monopoly price, quantity and profit?
b. Calculate the consumer surplus when the market is served by the unregulated monopoly and draw it in a diagram.
c. If, alternatively, the market is served by perfectly competitive firms and the marginal cost of the monopolist above is the supply curve in the competitive market, find the difference in the consumer
surplus between the two market structures? Draw the relevant diagram.
d. Back in the monopoly example: suppose that consumers become aware of negative health effects of
the monopolist’s product. The new demand for the monopolist’s good drops to QD = 2 -2P. What will
happen in this market in terms of the monopoly price, quantity and profit?