Question

4. Consider a simple demand curve

P = 100 - Q

A non-drastic innovation lowers the firms constant marginal cost from 20 to 10

(a) Find the monopolist firms value of innvation? Illustrate your answer graphically.

(b) Find the competitive firms value of innovation? Illustrate your answer graphically.

(c) Find the social plannerís value of innovation? Illustrate your answer graphically.

(d) Suppose now the incumbent monopolist expects a possible entry of the rival firm. Also, suppose a third firm discovered the technology which lowers the firms marginal cost from 20 to 10. If the incumbents obtains this technology, the incumbent is able to maintain its monopoly. However, if the entrant obtains this technology, two firms will compete in Cournot fashion. Find each firms willingness to bid for the innovation. Who will place the higher bid?

Answer 1

Answer :-