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.

a)
Does it appear that widgets
would be a luxury good or necessityIF
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?

b)
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?

c)
What are twoof the biggest threats
to their monopolistic profits (including recovering their sunk costs) before
their patent expires, and why?