hw08key - BINGHAMTON UNIVERSITY Department of Economics...

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BINGHAMTON UNIVERSITY Department of Economics Principles of Microeconomics (Econ 160B) Homework #8 Answer Key 1. Figure 13.11 shows the demand and cost conditions for a monopolist. What is the firm's maximum profit? How large is the deadweight loss due to monopoly? The monopolist will produce 10 units and charge a price of $15 each, so total revenue will equal $150. Average total cost is equal to $10, so total cost equals $100. Profit equals $150 - $100 = $50. To compute the deadweight loss, note that the monopolist produces 10 fewer units and sets the price $5 higher relative to a perfectly competitive market. The welfare loss equals the area of the triangle [(10 × $5)/2 = $25]. 2. Why does the government grant patents to companies that research new drugs? Researching new drugs is a very risky and expensive business. If the government did not grant the firm a patent then all other firms would be able to copy its innovation as soon as the FDA approved the drug. This competition would make
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hw08key - BINGHAMTON UNIVERSITY Department of Economics...

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