Question

Consider a firm that holds a monopoly over a market with the following demand D(p)=84- 2p.

It spends $300 on developing intellectual property and $6 for each additional unit produced.

Answer the following questions based on this information.

(a) The monopolist’s revenue starts declining with each additional unit sold if she sets a price below .......................................... (Enter the number).

(b) Suppose that the monopolist is able to maintain its monopoly through a patent. The patent acts as a barrier to entry; in its absence, other firms can copy the firm’s technology at its marginal cost. Assuming that the monopolist cannot price-discriminate, how much is the firm willing to pay the government to patent its property?

Answer 1

3) a) Q=84-2P

Price=42-0.5Q

MR=42-Q

In order to reduce TR, marginal revenue should be negative. Thus Quantity=42 and price=42/2=21

Thus if price is less than 21 then total revenue decreases

b)Profit is maximised when MR=MC

Thus MR=MC

42-Q=6 Quantity=36 and price=42-0.5(36)=42-18=24

Thus Profit=(24-6)*36=18*36=648

Thus firm will be willing to pay maximum 648 In order to get patent its property of monopoly