A Firm with a Patent Facing Consumer Demand

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Behavior at Different Prices

Note: in order to run the simulation referred to in this slide, go here, to the Java Applet version. You will be directed to download the latest version of the Java plug-in.

In this slide, we model a firm facing the same demand curve from before. In the control panel to the left, you can set the price at which the firm sells its innovation. Press "Go" and the demand curve will be graphed and the social cost, firm profit, and consumer surplus will be computed.

These quantities are displayed below. We also display the fraction of consumers who are active and buy the good and the fraction that are inactive and do not purchase the good.

Notice that as price increases, the firm's profits first rise and then fall (you might try price = 0.2, 2, and 3). Remember that the firm will rationally choose a price level at which the profit is maximized.

You can also use this slide to explore how the social cost changes as price increases. We explore these trends on the next slide.

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