Consider again the market studied in Question 2, The demand curve is given by P = 100 Q and the marginal cost curve is given by MC = 10. This time we are going to assume that firms must invest funds to develop the product before it can be sold in the market (think of a pharmaceutical company developing a new drug and incurring significant R&D cost in the process). Specifically, the development cost is given by F = 1, 000.

(a) Suppose that once one of the firms develops the product, other firms can easily copy it and enter the market. The resulting market structure will be a perfect competition. Will any of the firms have an incentive to develop the product? Why or why not? Compute the total surplus in this market. (10 marks)

(b) Now suppose that market is a monopoly. Will a monopoly firm have an incentive to develop the product? Why or why not? Compute the total surplus in this market. (10 marks)

(c) Which market structure delivers higher social welfare in this case? Explain. Can you think of any industries where this analysis would be applicable? Explain your reasoning. (5 marks)

Answer rating: 100% (QA)

Okay here is my analysis a Under perfect competition once one firm develops the product other firms ... View the full answer