Microsoft has a monopoly on operating systems for personal computers. (A court opinion, not mine.) Suppose that the annual demand for operating systems is P = 200 - 2.5*Q, where P is expressed in dollars and Q is millions of operating systems. The cost function for producing operating systems is C = 1000 + 10Q, where 10 represents the cost of producing and distributing CDs and packaging.

a) What price will Microsoft set for operating systems? How many operating systems will it produce and sell? What will Microsoft's profits be?

b) Suppose the market for operating systems were perfectly competitive. What price would be charged? How many would be sold? Would the firms in this industry be profitable?

c) You are a federal judge assigned to resolve the Microsoft issue. Given this information on costs and demand, plus your answers to parts (a) and (b), devise a scheme that would produce an outcome that would be most satisfying to consumers, while still allowing Microsoft shareholders to make a competitive rate of return.