P = $5,500 - $0.05*Q MR = $5,500 - $0.10*Q Where P is the product price, its qua
ID: 1235094 • Letter: P
Question
P = $5,500 - $0.05*Q
MR = $5,500 - $0.10*Q
Where P is the product price, its quantity sold is Q and MR isthe marginal revenue of the product. Fixed costsare zero since the research and development expenses have beenfully amortized in previous periods. Average variable costs areconstant at $4,500 per unit.
a. Calculate the profit maximizing price/output combination andeconomic profits if MBU enjoys an effective monopoly onQuickerBetter due to patent protection.
b. Calculate the price/output combination and the total economicprofits that would result if competitors offer clones that make theQuickerBetter market competitive.
c. What are the economic tradeoffs of allowing patent protection andeffective monopolies from a societal perspective? Explain.
Explanation / Answer
This is a monopoly question. A monopolist wants tomaximize profits, which are price*quantity - costs*quantity. First, some verbal background. Notice that a monopolist canvary its prices without losing all demand, because there are nocompetitors for customers to go to. The only constraint onmonopoly pricing is consumer willingness-to-pay. When amonopolist lowers prices, it has two effects on profits: 1) lower prices means that themonopolist earns lower revenues on every unit sold, and 2) because demand is downwardsloping, the quantity sold increases, raising the number of unitson which the monopolist earns revenues (but also increasing totalcosts, since the monopolist has to make more units) . The monopolist wants to sell units as long as the extra(marginal) revenue from making another unit is greater than theextra (marginal) costs from making that unit. This is similarto the competitive production decision (produce as long as pricegreater than marginal cost) with one major exception: price is notequal to marginal revenue. To sell another unit, themonopolist has to lower prices, which means earning less revenueson all the units the monopolist could have sold at a higherprice. So marginal revenue will be LESS than the price. . The cookbook recipe for solving a monopolist problem is Step 0: derive the marginal revenue formula (which you'regiven here, but which my students have to learn to derive from thedemand curve) Step 1: Find QUANTITY by setting MR = MC Step 2: Find PRICE by plugging the quantity from step 1 intothe demand curve, to find the price at which consumers are willingto buy that quantity Step 3: Profits = TR - TC . This problem has one major complication; they do NOT give youMC. However, they tell you that AVC is a constant4500/unit. This is possible only if the MC of each unit is4500. I'm hoping that this is self-evident; if not, thinkabout it for a minute.Related Questions
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