Reference no: EM13104993
The ACME company has a monopoly in making "widgets", which they sell for $100 each, at a quantity of 1 million units per year, at a marginal cost of $80 each.
Their monopoly comes from the fact that the company invented widgets through its own in-house research and development, at a cost of $100 million. It holds patents on this technology, which are due to expire in ten years.
Does it appear that widgets would be a luxury good or necessity IF they sol at the perfectly competitive equilibrium (which they don't), and why? What does this indicate about the relative harm (dead weight loss) created by this monopoly?
Since this is not a natural monopoly, but arises from possession of a scarce resource (the patent), you may assume that the average total cost curve is rising at the current quantity of production. If demand and cost curves remain stable, and if ACME is able to hold on to its monopoly for the rest of the patent's life, will they recover enough monopolistic profits to justify the cost of research and development, and why?
What are two of the biggest threats to their monopolistic profits (including recovering their sunk costs) before their patent expires, and why?
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