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The Best Computer Company just developed a new, computer chip, on which it immediately acquires a patent
The Best Computer Company just developed a new, computer chip, on which it immediately acquires a patent.
a. Draw a diagram that shows the consumer surplus, producer surplus, and total surplus in the market for this new chip.
b. What happens to these three measures of surplus if the firm can perfectly price discriminate? What is the change in deadweight loss? What transfers occur?
Expert Solution
a.
The patent gives the company a monopoly power.
After patent equilibrium Q and P are Pm and Qm.
CS = A+B
PS = C+D
TS = A+B+C+D
DWL = E
b.
If the firm can perfectly price discriminate. it will product Qc and extract all the CS.
As a result
CS = 0
PS = A+B+C+D+E = TS
DWL is reduced from E to zero.
There is a transfer of surplus from consumers to producers equal to the area of A+B.
please see attached file for full solution
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