Consider the following Market Demand and Cost conditions facing sellers in the market for public utilities. Market Demand: Q = 14 – p. Cost Function: C(Q) = Q2 + 2Q.

a. Suppose this market were perfectly competitive, derive the price and quantity that would result in the market equilibrium.

b. What would the quantity and price if there was a monopolist seller?

c. What is the Average Cost of production?

d. Suppose there was a regulated monopoly in this market where the seller was required to earn zero profits by setting Price equal to Average Cost. Derive the price and quantity that would result in this regulated market.

e. Compare the quantity obtained in perfect competition (answer to part a) with the regulated quantity (answer to part b.)

f. Many public utility companies are required, through regulation, to set prices so that they earn a “normal rate of return” on their investment. In other words, they are required to set prices so that they earn zero profits. The objective of the regulation is to mimic a perfectly competitive outcome where firms earn zero profits. Based on the numerical example above explain the problem with this kind of regulation. In your answer, be sure to explain the difference between earning zero profits and achieving market efficiency.