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Question

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1.Suppose the monopoly cannot perfectly price discriminate and faces a fixed cost of $7 million. The government gives the firm a ten-year patent. Which of the following statements is true?

A. Changing the length of the patent will have no effect on the economy

B.Consumers would benefit if the government gave a twenty-year patent instead of the ten-year patent

C.The monopoly would be indifferent between the ten-year patent and being given the twenty-year patent

D.Consumers would lose if the government gave a twenty-year patent instead of the ten-year patent

E.The monopoly would be worse off if given a twenty-year patent instead of the ten-year patent

Explanation / Answer

1

D.

If 20 years patent is given to the monopolist, then only monopolist will use the technology and put higher prices upon the products. It will make monopolist to earn positive economic profit, but consumers will pay higher price.

If only 10 years patent is given, the afterwards many other firms can use the technology. Then, many similar products will be available, but at lower prices.

Hence, consumers will lose if long term patent of 20 years is awarded to the monopolist.

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