1. A small business which produces plastic vacuum-suction covers for round house

Question

1.       A small business which produces plastic vacuum-suction covers for round household dishes has a monopoly that is protected by a utility patent. The market demand curve for this product is estimated to be: Q = 6009 %u2013 25P where Q is the number of plate covers per year and P is in dollars. Cost estimation processes have determined that the firm%u2019s cost function is represented by TC = 120 + 2500Q -0.25*Q2.

(i)                 What is the profit-maximizing price and output level? Solve this algebraically for equilibrium P and Q and also plot the MC, D and MR curves and illustrate the equilibrium point.

(ii)               What profit do you expect that the firm will make in the first year?

(iii)             Do you expect this profit level to continue in subsequent years? Why or why not?

Explanation / Answer

Any such patent would be of extremely limited value due to the low barriers to entry to parallel markets by competitors. Anyone and their dog could easily make equivalent covers with the identical function that would not infringe the patents.

The so-called "monopoly" would consist of the market of people who were too stupid to buy something cheaper from a competitor. Also, it would cost the company $250,000 or more in legal fees and court costs to actually attempt to enforce its patent, and the patent could be ruled by the court as being invalid, spoiling the whole game and negating any manufacturing or import license fees charged by the patent owners.

Patents generally expire within 20 years of their filing date, if not sooner.

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