A patent gives the inventor exclusive rights to manufacture and sell a product for a certain length of time (usually 17 years). Assume ABCGolf has invented a golf swing analyzer that makes it simple for a golfer to produce a solid golf swing and hit the golf ball long and straight. Further assume that ABCGolf’s patent gives it a monopoly on this golf swing improvement device.
a. ABCGolf is making an economic profit. Draw a correctly labeled graph that includes MR, Demand, MC, and ATC for this monopoly. Be sure your graph correctly shows the profit maximizing price and quantity and shades in the economic profit.
b. The product of ABCGolf uses several exotic raw materials. The government places a tax on those raw materials, and the MC and ATC both increase. How will the profit maximizing price and quantity change as a result? How do you know?
c. Assume that the government cancels ABCGolf’s patent. Other firms are now allowed to produce and sell this very popular device. What will happen to ABCGolf’s profits in the long-run? What will happen to price and quantity in this newly competitive market?