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 as follows:

P = $5,500 - $0.005 Q

MR = TR/Q = $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-output combination and economic profits if MicroChips enjoys an effective monopoly because of patent protection.

B. Calculate the price-output combination and total economic profits that would result if competitors offer clones that make the market perfectly competitive.

(Please show the steps)

Explanation / Answer

P = $5,500 - $0.005 Q

MR = TR/Q = $5,500 - $0.01Q

Average variable Cost = AVC = MC = $4,500 per unit

Profit = Total Revenue - Total Cost

= Price*quantity - MC*Quantity

Profit will be maximized where MC = MR , This condition comes by

dprofit/dquantity = MR - MC

first order condition for profit maximization

  dprofit/dquantity = 0

MR = MC

  $5,500 - $0.01Q = $4,500

Q = 1,000*100 = 1,00,000

So P =  $5,500 - $0.005 *1,00,000 = $5,000

Profit = Total Revenue - Total Cost

= Price*quantity - MC*Quantity

= $5,000*1,00,000 - 4,500*1,00,000

= $500,00,000

In case of Perfect Competition

Equilibrium will happen, where P = MC

So ,    $5,500 - $0.005 Q =MC

   $5,500 - $0.005 Q = $4,500

Hence Q = 1000/0.005 = 200,000

So , P =  $5,500 - $0.005*200,000 = $4,500

  Profit  = Total Revenue - Total Cost

= Price*quantity - MC*Quantity

= $4,500*2,00,000 - 4,500*2,00,000

= 0

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