A legal change is proposed to extend patents from 20 years to 23 years. If passed, this will affect future patents as well as patents granted earlier (i.e. it is retroactive).
Recall that, if the interest rate is r, then the present value (PV) of $X n years in the future is: (1/(1+r))^n*X
For each of the parts below, assume that a monopoly in the invention earns $X in profit each year, and the interest rate will be constant at r.
(b) If a company has just patented its invention the day before the legal change, how much extra is the change worth to them (in present value)?
(c) If a company patented its invention almost 20 years ago but the patent has not yet expired, how much extra is the change worth to them (in present value)?
(d) Which is greater, the value in part (b) or in part (c)?
(e) If a company is considering developing the invention, how much more would they be willing to spend in R & D?
(f) We assumed that a monopoly in the invention earns $X in profit each year. i. What is a more realistic assumption?
ii. Will the more realistic assumption increase or decrease the amount in part (e)?