During recent years, MicroChips Corp. has enjoyed substantial economic profits d

Question

During recent years, MicroChips Corp. has enjoyed substantial economic profits derived from patents covering a wide range of inventions and innovations for microprocessors used in high-performance desktop computers. A recent introduction, the Penultimate, has proven especially profitable. Market demand and marginal revenue relations for the product are respectively given by P=5,500 - 0.005Q and MR=5,500 - 0.01Q. Fixed costs are nil because research and development expenses have been fully amortized during previous periods. Average variable costs are constant at $4,500 per unit.

A. Calculate the profit-maximizing price and output produced if MicroChips enjoys an effective monopoly because of patent protection. Show your calculations.                                 (2+2+6 points)

B. Once patents expire competitors will enter this industry and start producing clones similar to products offered by MicroChips Corp. Calculate the price and output combination that would result as a result of this entry that makes the market a perfectly competitive industry. Show your calculations.                                                                                                                 (2+2+6 points)

5. Enrodes is a monopoly provider of residential electricity in a region of northern Michigan. Total demand by its 3 million households is given by Q=11 – P so that marginal revenue is MR=11– 2Q. The total cost of Enrodes is given as C=16 +Q so that marginal cost is $1 per megawatt-hour. Consumers in this region of Michigan have recently complained that Enrodes is charging too much for its services. In fact, few consumers are so upset that they are trying to form a coalition to lobby the local government to regulate the price Enrodes charges.

If consumers are successful in their lobbying efforts and regulation is placed on Enrodes, calculate the price, output and profit of Enrodes under the following circumstances. Show your calculations in each case.

A. Regulator institutes average-cost pricing.                                                    (2+2+2+9 points)

B. Regulator institutes marginal-cost pricing.                                                  (2+2+2+9 points)

Topic 9:

6. You are the manager of a small pharmaceutical company that received a patent on a new drug three years ago. Despite strong sales ($150 million last year) and a low marginal cost of producing the product ($0.50 per pill), your company has yet to show a profit from selling the drug. This is, in part, due to the fact that the company spent $1.7 billion developing the drug and obtaining FDA approval. An economist has estimated that, at the current price of $1.50 per pill, the own price elasticity of demand for the drug is -2. Based on this information, what can you do to boost profits? Explain with proper calculations.

Explanation / Answer

P=5,500 - 0.005Q

MR=5,500 - 0.01Q.

AFC = 0

AVC = $4,500 per unit

ATC = AFC + AVC

In a profit-maximizing monopolist,

, MR = MC

MR = 5,500 - 0.01Q.= MC

. In perfect competitive firm, price = marginal cost = average total cost

Thus, MC= ATC= P, where P= price

P=5,500 - 0.005Q = MC

Thus,

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