Question

3. Profit Maximization in competitive markets. As a small entrepreneur specialized in government contracts, you have enjoyed substantial economic profits derived from patents covering a wide range of innovations that greatly increases the performance of a computer workstations used in a variety for homeland security applications. You are now ready to introduce a new Workstation called ULTRA2006. Extensive analysis of past and current information reveled that market demand for the ULTRA2006 is given by

P= $5500-$0.005Q

Where Q is the quantity of ULTRA2006 Workstation sold per week and P is the price per unit. Fixed costs are nil because research and development expenses were paid with a government grant, and all other fixed costs have been fully amortized. The average variable cost is constant at $4,500 per unit [Hint: when the average variable cost is constant, the average variable cost equals to marginal cost].

1. Calculate the profit-maximizing price/quantity combination and economic profit per week while your firm enjoys an effective monopoly due to patent protection.

2. Calculate the profit-maximizing price/quantity combination and economic profit per week if the patent expires and competitors offer clones that makes the ULTRA2006 market perfectly competitive, assuming that the demand equation above still applies.
3. Compare the total surplus created when the company operated as a monopoly to the total surplus created after the market became competitive.

Answer 1

MAY 2017 Ginen: P 25500 0.0058 AUC= 4500 (constant) AVC = mc a) Profit maximization o u kи места in Monopoly TR = PXQ =/5500 -0.00500 TR 2 S500 Q- oro 502 A TR To fund MR, differentiate MR = 500 - 00810 and mca 4520 Equating mRemovala 5500 -0.018 = 4520 Toz 100 on Putting the value of a in P2 5500-o.coso P² S500 0.00 C100 ore) 2 20-820 TP 2500 Economic profit under Monopole Economic profit occurs when price is more than ATC on bu As we do not have Afc and ANC su is 4500 ATC wie ke 4520. M Economic T W T F 1 2 6 7 8 9 13 14 15 16 20 21 22 23 27 28 29 30 5 12 19 26 S S 3 4 10 11 17 18 24 25 profit & feice - ATC 2 522o4w

under MAY 2015 MON b) Profit maximization 22 perfect competition C ) In short run, it will same as Mong Economic profel - sunce theu is posilue economic profit in the short run, there should be entey of feins in the long run resulting in an increase in the market quantity, a decrease in market price and freins in the industry earning zero economic profil and Mc = ATC. TO TUE c) Os Total surplus Ý the summation of consumer supues and produels supplies. 23 s Total suspeus under Monopoly 2 MR=sro - o. olg p = rout? 92160 W c. S = 1 (5500-szow) Cleo ao) = 2500 eva WK 21 (143-222) As demand function is quien in the question, we could fuid ces but supply function is not quien, therefon pas cannot be calculated M T W T F S S Tos in Monopoly P7MC P2MC I 24 25 26 27 28 29 30 12 23 Aome Lo Gre 17 18 19 Ps 15 16 26 21 22 23 APR-2017

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