Text Question 6.2 Woz Enterprises specializes in electrical components. The mark

Question

Text Question 6.2 Woz Enterprises specializes in electrical components. The market for one particular component is perfectly competitive and in long run equilibrium. The marginal cost is constant at 30. Woz can develop a much cheaper process for producing this component, lowering its marginal cost to 6. The R&D; cost of developing the new process would be F and Woz would be able to obtain a patent for it and become a monopoly supplier of this component. Demand for the product over the relevant period is given by p-46-20. Suppose the cost of the investment is F 140. Are consumers made better off by the actions taken by Woz? Does total surplus rise? If Woz invests, then the change in consumer surplus (ACS) is ACS $ 36. (Enter your response as a whole number) The change in total surplus is A Total Suplus $ 00. (Enter your response as a whole number)

Explanation / Answer

Under perfect competition price is $30 so quantity demanded is 30 = 46 -2Q

Q = 8 and so consumer surplus = 0.5*(46 - 30)*8 = $64. SInce P = MC, there is no producer surplus. Hence total surplus is 64

Under monopoly, quantity and price are

MR = MC

46 - 4Q = 6

Q = 10 and P = 46 - 2*10 = $26

Consumer surplus = 0.5*(46 - 26)*10 = $100. Producer surplus = (26 - 6)*10 = 200. Total surplus = 200 + 100 = $300

Now change in consumer surplus = 100 - 64 = 36

Change in total surplus = 300 - 64 = 236

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