Water is formed and sold by the government. Demand for water is represented by the linear function Q=50-2P. The total cost function for water production is also a linear function: TC (Q) = 100 + 10Q.
1. Demonstrate and explain how much the government should charge per unit of water to reach efficient allocation?
2. Demonstrate and discuss how much the government should charge if it wishes to maximize profit from the sale of water? What are profits?
3. Determine the value of the efficiency loss that results from charging the profit maximizing price in part "b" rather than the price determined in part "a".