Question

Please answer all sections:

Suppose that Nokia has a monopoly in the market for 5g base stations. In

order to construct a network with Q base stations, it costs Nokia TC =8Q+50 and hence the

marginal cost is MC=8.

(a) (5 points) The demand for 5g base stations is Q=12−0.25P. Find the level of output that

maximizes Nokia’s profits. What price is Nokia charging? What is the profit?

(b) (5 points) What level of output would maximize total surplus in the 5g base station market?

How much more surplus the market generates compared to the monopolistic market outcome?

(c) (5 points) If the government provide Nokia a subsidy of S for every unit of 5g base station

produced, which will decrease the marginal cost to MC=8-S, what quantity would Nokia

choose as a function of S? How much more will Nokia produce when the subsidy S increases

by one unit.

(d) (5 points) Find the choice of subsidy S if the government want to induce Nokia to produce

the efficient quantity from part (b), i.e. the output level that maximizes total surplus.

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(e) (5 points) Suppose the government knew the demand and production functions. Find a price

regulation the government could impose that would induce Nokia to maximize total surplus,

i.e., produce the efficient quantity from part (b).

(f) (5 points) An alternative price regulation is to impose a price ceiling ?̅ = ???. Discuss

why someone might prefer this alternative price regulation over the one from part (e).

Answer 1