Economics:
A modest sized city is currently considering ways of providing broad band internet
service to its citizens which is not currently available. Based on analyses from other
cities, they estimate that market demand in their city is P = 20 - .1Q, where Q is
measured in thousands of households served and P is the price of monthly service in
10s of dollars. The marginal cost of supplying the service is P = 1 + .001Q.
A group of city counselors believes the city should own and operate the system for
the purpose of maximizing net revenues (i.e., maximizing profits) Thus, the city
would be the monopoly provider. The monopoly profits could be used as a stream of
municipal revenues instead of property taxation.

A. If these city counselors get their way, what will be the price and quantity of broad
band service in the city? Sketch your answer as well as calculate it numerically.
What is the city’s mark-up over marginal cost? What is the elasticity of demand at
this equilibrium?
B. If instead the city instead decides to provide the service at the efficient level, what
would be the price and number of household served? What is the price elasticity of
demand at this level of service?
C. Compare the monopolist vs. the efficient outcome, what is the DWL involved in
allowing the city to act as a monopolist? Again, provide a sketch of your answer in
addition to the calculations.
D. If the city counselors who want the city to act as the broad band internet monopoly
find that basically no senior citizens are taking advantage of the service but everyone
else is, what would be the profit-maximizing lower price they could offer to the
senior citizens? How many senior citizen households would now also buy the
service? What happens to the DWL?