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Chapter 16 Problems

4. A monopolist without patent protection would still have strong incentives to innovate, in order to maintain the monopoly position and profit levels of the firm. The competitive firm would be forced to innovate in order to survive, since there is no cushion of monopoly profits to fall back on. By staying ahead of competition, innovation is a way to earn above-normal profits until others catch up.

In the case of a monopolist with patent protection, the incentives to innovate are likely to be reduced. The monopolist might carry out an extensive research and development program, but delay bringing innovations to the market unless they are clearly and immediately profitable, or unless they are needed to forestall new competition.

6. The bulk plastic industry analysis:
a. P 800 i­ 20 Q TC 300 + 500 Q + 10 Q2
TR 800Q i­ 20 Q2 MC 500 + 20 Q
MR 800 i­ 40 Q
MC MR, implies: 500 + 20 Q 800 i­ 40 Q, or 60 Q 300, or Q* 5
P* 800 i­ 20(5) 700.

c. MC MR, as is the case in competition.
500 + 20Q 620, or 120 20 Q, or Q* 6 and P* $620.

9.Branding Iron Products pollutes the air and water.

The tax alternative is desirable in that it internalizes costs to the firm, causing it to adjust its price, output, and production technology in order to maximize profits, while considering the cost of the externalities it generates. The most difficult aspect of this alternative is specifying the amount of pollution tax rate so that the firm will reduce its pollution to a Satisfactorylevel.

It is probably not desirable to absolutely prohibit pollution by the firm, since it is likely that the cost of eliminating the last few percentage points of pollution will be very high.

Like the Coase Theorem, if Branding Iron has a property right to pollute, it could be paid to reduce that pollution. Indeed, there is a presumption that Branding Iron was operating for some time before the a?new residentsa? start to complain.