Question

Market demand for lifetime sales of the product is P=12000-2Q. Research and development fixed cost of $2000000. Its mariginal cost are $1000 for the first 1500 impants. From 1501st implant onwards marginal cost increase to $2000 as they have to pay overtime charges.

Monopolies lead to a welfare loss compared to perfect competition. Calculate this "deadweight loss" of Monopoly.

Should government always try to elimate monopolised markets? Why or why not?

Answer 1

Patent gives exclusive right to make, use or sell the patented product to a particular firm. Thus, for the good there will be no substitute in the market. We know, a monopoly is a firm with sufficient market power that it can raise the price of the good above marginal cost and enjoys super normal profit; without fearing that other firm will enter into the market. Thus, patent gives the monopoly power to the firm, and is a government grant. Hence, the patent is a government created monopoly. The monopoly profit and patent protection often encourages firm to engage in research and development to invent some new product. Thus, by stronger patent law government encourages research and development. The more the R& D level of the economy the more divarse and better will be the standard of living in a economy.