Suppose Sony develops a chip that can be implanted in someone’s head, allowing them to access the internet through their minds. No other company has the technology necessary for this, so Sony has a monopoly.
a. Draw the initial equilibrium for such a market. This should include a downward sloping demand curve, a marginal revenue curve, marginal cost curve, and the equilibrium price and quantity should be labeled, though there will be no numbers.
b. Now suppose the demand for the implant shifts outward slightly. Show that, in general (contrary to the competitive case), it will not be possible to predict the effect of this shift in demand on the market price of the implant.
c. Consider three possible ways in which the price elasticity of demand might change as the demand curve shifts: it might increase, it might decrease, or it might stay the same. Consider also that marginal costs for the monopolist might be rising, falling or constant in the range where MR=MC. Consequently, there are nine different combinations of types of demand shifts and marginal cost slope configurations. Analyze each of these to determine for which it is possible to make a definite prediction about the effect of the shift in demand on the price of Hula Hoops.