Benefits of Monopolies, Fixed Costs, and Implications
Benefits of Monopoly: Incentives for R and D
- patents are one way rewarding research and development * if patents aren’t enforced or if drug prices are controlled, fewer drugs will be invented
- without patents, firms wouldn’t spend on R and D, fewer new drugs would be developed
Fixed Costs
- expenses that don’t depend on level of production and are recurring over a period of time * rent, interest payments, etc. * aka: indirect or overhead costs
- total costs are fixed costs and variable costs
Welfare Implications of Monopoly
- consumers: worse off * monopolists charge higher prices, produce less
- producers: benefit * receive a higher price for product than they normally would
- total surplus which means consumer + producer surplus * consumer surplus will be lower * producer surplus will be higher
Monopoly With Fixed Costs
- given TC = 500 + 120(Q) * marginal costs = 120 * average costs: 500/Q + 120 * as production increases, average costs approaches marginal costs
- given inverse demand curve P = 600 - 3Q * marginal revenues: MR = 600 - 6Q
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