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 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 42-2Q Suppose the cost of the investment is F 87. 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 &CS-SI-;(Enter your response as a whole number) The change in total surplus is Total Surplus-SLI (Enter your response as a whole number.

Explanation / Answer

suppose, before the investment. MC =30

profit maximizing quantity and price is where MR=MC

MR = 42 - 4Q and MC = 30

42-4Q = 30

12 = 4Q or Q = 3

P =42 - 2*3 or P = 36

therefore, the equilbruim price is 36 and quantity is 3.

CS = 1/2 * ( 42-36) * 3 = $9

PS = 1/2 * ( 36-30) * 3 = $9

TS = $ 18

now, mc reduced to 3

now do MR =MC

42-4Q = 6

36 = 4Q or Q = 9

P = 42-2*9 or P =24

CS = 1/2 * (42-24) * 9 = $81

PS = 1/2 *(24-6) * 9 = $81

TS = $162

therefore, change in consumer surplus = 81 - 9 = $72

CHange in total surplus = 162 - 18 = $144

Therefroe, we can say that, ye consumer will be better off by the actions taken by Woz because consumer surplus rises.

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