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QUESTION
Suppose a monopoly must decide on a level of RD along with production levels. RD is expensive initially, but lowers the marginal cost of production....
Suppose a monopoly must decide on a level of R&D along with production levels. R&D is expensive initially, but lowers the marginal cost of production. Suppose the firm faces costs C(q,r) = ar^2 + (c-r)q, and must decide on a level of R&D expenditure and how much of the good to produce, q. Inverse demand is given by p(q) = a-bq.
(a) What is the firm's objective function?
(b) What are the firm's first-order conditions?
(c) What are the optimal q? and r??
(d) Under what levels of does the firm invest in R&D?
Monopoly(a) What is the firm's objective function?Profit functionCost = ar2 + (c-r)qDemand p(q) = a – bqTR = p*q = (a –bq)*q= aq – bq2Objective function (Profit function) = TR – TC...