Industrial Org

inverse demand function is P = 170 Q per year.

interest rate is r = 0.05 .

cost structure of a firm is given by C(q) = 80 q.

A research institute develops a new technology that reduces marginal cost to 50 and upon entering the market it competes on quantity with the incumbent (who cannot access the new technology). As a result, per year profits for the firms are: 400 for the incumbent and 2500 for the entrant.

Question: The research institute can sell the new technology to the monopolist and then stay out of the market. If it is safe to assume that no more advances will be made in the future, then the maximum price that the monopolist is willing to pay for the innovation and the minimum price that the research institute is willing to receive for it are respectively:

42,000 and 33,600 so the monopolist ends up buying the new technology.

67,200 and 52,500 so the monopolist ends up buying the new technology.

75,600 and 33,600 so the monopolist ends up buying the new technology.

42,000 and 52,500 so the monopolist ends up not buying the new technology.