In Question 6.1 with an R&D cost of 150, suppose that the government waits until Woz works out the new process and then changes patent rules, requiring Woz to charge a price no greater than 12. Does Woz stay in business? What happens to consumer surplus and to total surplus? Why don’t governments impose such price controls on patented processes and products?

Question 6.1

Woz Enterprises specializes in electrical components. The market for one particular component is perfectly competitive and in long-run equilibrium. Marginal cost is constant at 30. Woz can develop a much cheaper process for producing this component, lowering its marginal cost to 10. The R&D cost of developing the new process would be F, and Woz would be able to obtain a patent for it and become a monopoly supplier of this component. Demand for the product over the relevant period is given by p = 50 - 2Q. Show that the R&D investment would be worthwhile (raise profit) for Woz if F = 150 but not if F = 250. What is the critical value for F that determines whether R&D is worthwhile for Woz?