ECN 410: Economics of Innovation and Technology

Department of Economics
Syracuse University
Spring 2023

Answers for Select Questions on Exam 2 Study Guide

2.
a. It is non-drastic because the innovating firm’s profit-maximizing monopoly price P M = 85
is greater than other firms’ price P = 80, and therefore the innovating firm needs to
reduce its price to 80.
b. It is drastic because the innovating firm’s profit-maximizing monopoly price is P M = 75,
which is lower than the price of other firms.
c. P = MC0  100 – Q = 80  Q0 = 20. MR(Q = 20) = 100 – 2(20) = 60.
3.
a. Profit before innovation Π0 = 0, Q = 50 (MC = P)
After innovation, the innovating firm sets price equal 100 and produces Q = 50. Π1 =
(100–70)*50 = 1500
Maximum amount to spend on innovation = Π1 - Π0 = 1500
b. Before innovation, MR = MC0  150 – 2Q = 100  Q = 25 and P = 125  Π0 = (125-
100)*25 = 625
After innovation, MR = MC1  150 - 2Q = 70  Q = 40 and P = 110  Π1 = (110-
70)*40 = 1600
Maximum amount to spend on innovation = Π1 - Π0 = 975
c. Replacement Effect (See PPT)
7.
a. MR1 = MC1  200-2q1-q2 = 110
MR2 = MC2  200-q1-2q2 = 110
Solving the two equations, q1 = 30, q2 = 30 and P = 140
Π1 = (140-110)*30 = 900
Π2 = (140-110)*30 = 900
b. Assume Firm 1 obtains the innovation.
MR1 = MC1  200-2q1-q2 = 80
MR2 = MC2  200-q1-2q2 = 110
Solving the two equations, q1 = 50, q2 = 20 and P = 130
Π1 = (130-80)*50 = 2500
Π2 = (130-110)*20 = 400
Firm 1 will be willing to spend up to (2500 – 400) = 2100 on the innovation.
8. Let Π0 be the profit before innovation and Π1 the profit after innovation.
Maximum amount to spend on innovation (incentive to innovate) = Π1 – Π0
2 2 2 2
500−2∗300+ 300 200 500−2∗240+300 320
a. When n = 2, π 0=( ) =( ) and π 1=( ) =( )
2+ 1 3 2+1 3
500−5∗300+4∗300 2 200 2 500−5∗240+ 4∗300 2 500 2
When n = 5, π 0=( ) =( ) and π 1=( ) =( )
5+ 1 6 5+1 6
500−8∗300+7∗300 2 200 2 500−8∗240+7∗300 2 680 2
When n = 8, π 0=( ) =( ) and π 1=( ) =( )
8+1 9 8+1 9
2 2 2 2
500−2∗300+ 300 200 500−2∗200+300 400
b. When n = 2, π 0=( ) =( ) and π 1=( ) =( )
2+ 1 3 2+1 3
2 2
500−5∗300+4∗300 200 500−5∗200+ 4∗300 2 700 2
When n = 5, π 0=( ) =( ) and π 1=( ) =( )
5+ 1 6 5+1 6
 2 2 2 2
500−8∗300+7∗300 200 500−8∗200+7∗300 1000
When n = 8, π 0=( ) =( ) and π 1=( ) =( )
8+1 9 8+1 9
10. If the entrant firm obtains the technology, the market becomes a duopoly. Let q I be the qty
produce by the incumbent firm and qE be the qty produced by the entrant firm.
MRE = MC1  100-qI-2qE = 40
MRI = MC0  100-2qI-qE = 60
qE = 80/3 and qI = 20/3  P = 200/3
ΠE = (200/3 – 40)*(80/3) = 6400/9
ΠI = (200/3 – 60)*(20/3) = 400/9

If the incumbent firm obtains the technology, the market remains a monopoly.
MRI = MC1  100-2Q = 40  Q = 30, P = 70, and ΠI = (70–30)*30 = 1200
a. 6400/9
b. 1200 - 400/9 = 10400/9
23.
∂F
b. Profit is maximized when s ∙ A ∙
=w  5*10*H-0.5 = 10  H = 25
∂H
c. A person becomes an entrepreneur if ( s ∙ A ∙ F ( H )−w ∙ H )>w ∙ A  2.7*A*10(25)0.5 – 10*25
> 10A  A > 2