Suppose the demand curve for widgets is given by p=100 - q where p is the price, and q is the quantity.

a) If the market is served by a single monopolist with constant marginal cost of mc1=$80, what is its incentive (or additional profit) from developing a cost-saving process innovation that reduces marginal cost to mc2=$20?

b) If the market is competitive, and firms sell widgets at a price equal to constant marginal cost mc₁=$80, what is an individual firm's incentive to develop the same cost-saving process innovation (for which it obtains a patent to exclude other firms) that reduces marginal cost to mc₂=$20?

c) The incentive of the competitive firm exceeds the monopolist's incentive by how much?