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A monopoly can use one of two alternative technologies. One technologyrequires 10 units of capital and 11 units of labor for each unit of output. The othertechnology requires 20 units of capital and 2 units of labor for each unit of output. Theprices of capital, r, and of labor, w, are r = w = $1 per time period. Thus, the costfunction associated with the first technology is 21 and the cost functioncorresponding to the second technology is 22. The demand function is givenby
Py100 - y
The unregulated monopolist will clearly use the first technology since it is the lower costtechnology.
a) Calculate the monopoly's output, price, and profit if it uses the first technology. Consider a rate of return regulation which allows the monopoly to take as profit only $0.1 per each $1 of capital.
b) What would be the output, price and profit under each technology?
c) Calculate the total surplus in the unregulated monopoly situation under theabove regulation, and in a situation in which the firm is subject to that regulationbut only the first technology is available.
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