A monopolist faces the demand curve P = 11 - Q, where P is measured in dollars per unit and Q in thou- sands of units. The monopolist has a constant average cost of $6 per unit.
a. Draw the average and marginal revenue curves and the average and marginal cost curves. What are the monopolist's profit-maximizing price and quantity? What is the resulting profit? Calculate the firm's degree of monopoly power using the Lerner index.
b. A government regulatory agency sets a price ceiling of $7 per unit. What quantity will be produced, and what will the firm's profit be? What happens to the degree of monopoly power?
c. What price ceiling yields the largest level of out- put? What is that level of output? What is the firm's degree of monopoly power at this price?