Assume the demand for a particular product is given by p = 120 - q and firms produce at linear costs c(q) = cq = 80q. Suppose a new production technology lowers marginal costs to 60, i.e., firms can produce with c(q) = cq = 60q, if they spend K. The innovation is protected by a patent, i.e., only the firm who adopts the innovation can produce at the lower cost. Take the perspective of a social planner who wants to maximize the social surplus, i.e., the sum of consumer surplus and producer profit in this market. (i) Derive the formula for the consumer surplus. (ii) What is the price and the quantity a social planner chooses without innovation? How big is the social surplus? (iii) What is the price and the quantity a social planner chooses with innovation? How much does the social surplus increase with this innovation? (iv) Suppose K = 600. Is the innovation worthwhile from a social planner perspective? What if K = 1500? How does your answer change if you consider multiple periods?

Assume the demand for a particular product is given by p = 120 - q and firms produce at linear costs c(q) = cq = 80q. Suppose a new production technology lowers marginal costs to 60, i.e., firms can produce with c(q) = cq = 60q, if they spend K. The innovation is protected by a patent, i.e., only the firm who adopts the innovation can produce at the lower cost. Take the perspective of a social planner who wants to maximize the social surplus, i.e., the sum of consumer surplus and producer profit in this market. (i) Derive the formula for the consumer surplus. (ii) What is the price and the quantity a social planner chooses without innovation? How big is the social surplus? (iii) What is the price and the quantity a social planner chooses with innovation? How much does the social surplus increase with this innovation? (iv) Suppose K = 600. Is the innovation worthwhile from a social planner perspective? What if K = 1500? How does your answer change if you consider multiple periods?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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