Woz Enterprises specializes in electrical components. The market for one particu

Question

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 10. 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 Denand for the product over the relevant period is given by p42-20 Suppose the cost of the investment is F 68. 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 as.4D(Enter your response as a whoe number)

Explanation / Answer

Under perfect competition with long run, price is equal to MC which is 30 so P = 30. At demand P = 42 - 2Q, we have

30 = 42 - 2Q

Q = 6 units and price = 30. Consumer surplus = 0.5*(42 - 30)*6 = $36.

With monopoly MR = 42 - 4Q and MC = 10, new quantity is

42 - 4Q = 10

Q* = 8 and price P = 42 - 16 =26. Hence consumer surplus = 0.5*(42 - 26)*8 = $64

Change in consumer surplus = 64 - 36 = $28

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