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Consider a single-product monopolist whose costs in each period involve no sunk costs, no fixed costs, and variable costs that are generated by a constant marginal cost of of $1

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Consider a single-product monopolist whose costs in each period involve

no sunk costs, no fixed costs, and variable costs that are generated by a constant marginal cost of of $1.00 per unit of the product that is produced. The market demand curve for this monopolist's product is Q = 100 − 10P. This monopolist cannot sustain price discrimination. Assume that this monopolist is extremely myopic and always chooses its current period output to maximise its current period economic profit. The monopolist is currently unregulated. Suppose that the relevant regulator announces that, in future, the monopolist will be subjected to regulation in the form of the Vogelsang-Finsinger mechanism. This regulation will begin in the next period (period two), and will be initially based on the relevant cost and output data from period one. In the current period (period one), the monopolist will remain unregulated.


2. What is the target price of this regulation? Justify your answer.


3. Will the target price ever be achieved? If so, in what period will the target price first be achieved? If not, explain why not. Justify your answers.


4. Regardless of whether or not the target price is ever actually achieved in this case, suppose that it is achieved for the first time in some future period (say, period k). Will the target price continue to be achieved in all periods after period k as long as the Vogelsang-Finsinger regulatory mechanism remains in place? Justify your answer. (5 marks.)