3. Monopoly in the market for intellectual property Fluxtron is launching some n

Question

3. Monopoly in the market for intellectual property Fluxtron is launching some new software. Developing the new software involves a relatively high fixed cost of roughly $6 million. Fluxtron's marginal cost of producing the software is zero. Having obtained a copyright, Fluxtron acts as a monopolist in the market for its new software. The following graph shows the demand, marginal revenue (MR), and average cost (AC) curves for the software. Keeping in mind that the marginal cost (MC) of production is zero, the profit-maximizing quantity of the software is 200,000 units, and the profit-maximizing price is $80 per unit of software. On the graph, use the green triangle (triangle symbols) to shade the area that represents consumer surplus at Fluxtron's profit-maximizing price. Then use the red rectangle (cross symbols) to shade the area that represents total cost at the profit-maximizing output level. Finally, use the orange rectangle (square symbols) to shade the area that represents Fluxtron's profit at the profit-maximizing price and quantity. PRICE (Dollars 160 140 Consumer surplus Total cost 120 100 Profit 80 & 60 40 Demand Gain in Surplus AC 20 MR QUANTITY (Hundreds of thousands) Help Clear AlL units. The socially optimal, or efficient, quantity of software is profit-maximizing quantity at the price. Consider all of the consumers with a zero or greater willingness to pay who did not purchase Suppose that Fluxtron incurs the fixed cost of developing the software and sells the the software at the profit-maximizing price. Assume that all of these consumers make pirated copies of the software for free. On the software piracy. previous graph, use the tan triangle (dash symbols) to show the gain in total surplus from the

Explanation / Answer

Monopolist produces Q=200000 and price=80

Socially efficient is at a point where MC=P

Thus socially efficient output=400000

New surplus will be added which is equal to area below AC

True

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