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    Monopoly regulation

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    Cable co: Demand curve for monthly service:

    P=$37.50 -$0.0005Q.This implies annual demand and marginal revenue curves of:
    P=$450 -$0.006Q
    where P is service in dollars and Q is no. of customers served.Total and marginal costs per year(before investment return) are described by the function:
    The co.has assets of $1.5 million and the utility commission has authorized a 15% return on investment.
    A. Calculate profit-max price(monthly and annually), output, and rate of return levels.
    B. What monthly price should commission grant to limit cable co. to a 15% rate of return? (please explain all steps used in calculation)

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    Solution Preview

    A. calculate profit-max price(monthly and annually), output, and rate of return levels
    To max profit, the first order condition of the firm is:

    MR=MC, or
    450-0.012Q=75+0.003Q, or
    0.015 Q = 375
    solve for Q= 25,000
    then from the demand curve, ...

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