Initially, a competitive market has many firms that produce at a constant margin
ID: 1110827 • Letter: I
Question
Initially, a competitive market has many firms that produce at a constant marginal and average cost, m, so that the competitive market supply is horizontal at m. At the competitive equilibrium, ec, the market price, p* equals m, and the quantity is Q* Market demand A firm invests in a new process that lowers the cost of production 20% to 0.8m. If it were an unconstrained monopoly, the innovating firm would sell Om units, which is determined by the intersection of its red marginal cost line at 0.8m and the light purple marginal revenue curve, which corresponds to the light blue market demand curve, at pm Residual demand Who benefits and who loses from the invention? 0.8m Innovalor's MC Relative to the competitive market outcome before the innovation, MR A. the innovating firm and consumers benefit O B. the innovating firm, the other firms. and consumers benefit. C. only the innovating firm benefits. 0 D. only consumers benefit. 0 E, the innovating firm and the other firms benefit. Does the innovating firm c apture the full value of its innov I ation? Q, Units per day The innovating firm capturespercent of the value of the innovon Enter your response rounded to the nearest whole number)Explanation / Answer
Only the innovative firm benefits.
This is so because by innovating it is able to charge a price higher than mc and other firms cannot do so as they do not have the technology. Consumers lose add they have to pay higher Price than they were paying before.
The firm captures full value of its Innovation. It captures 100% of the value.
Capturing the benefit depends on market power. Since the firm is unregulated monopoly, it had highest market power and can charger highest price.