A monopoly sells music CDs. It has a constant marginal and average cost of 20. It faces two groups of potential customers: honest and dishonest people. The dishonest and the honest consumers’ demand functions are the same: P = 120 - Q
a. If it is not possible for the dishonest customers to steal the music, what are the monopoly’s profitmaximizing price and quantity? What is its profit? What are the consumer surplus, producer surplus, and welfare?
b. Answer the same questions as in the previous part if the dishonest customers can pirate the music.
c. How do consumer surplus, producer surplus, and welfare change if piracy occurs?