Analyze the baseline model of Schumpeterian growth in Section 14.1 assuming that (14.5) is not…

Analyze the baseline model of Schumpeterian growth in Section 14.1 assuming that (14.5) is not satisfied.

(a) Show that monopolists set a limit price.

(b) Characterize the BGP equilibrium growth rate.

(c) Characterize the Pareto optimal allocation, and compare it to the equilibrium.

(d) Now consider a hypothetical economy in which the previous highest quality producer disappears, so that the monopolist can charge a markup of 1/(1- ß) instead of the limit price. Show that the BGP growth rate in this hypothetical economy is strictly greater than the growth rate characterized in part b. Explain this result.

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