Question

Problem 1. LG Industries Electric (LG) has developed a widely used snow melting laser that is used to remove snow and ice from roofs of houses and from cars. Though highly effective in melting snow there is a small chance (8%) the laser will melt a car's tires or burn a hole in the roof. The demand for this laser snow melter is Qd 2000- 2.5 P. The laser's marginal cost function is MC 400 and AC= 400 as well (a) Find LG's profit maximizing price and output for the laser snow melter. Would you purchase one for your home at this price? Why? (b) Is LG earning a profit or loss? How much is this profit or loss? (c) Graph the above monopoly profit maximizing equilibrium indicating key values and profit (d) A potential small competitor with a laser beam capability has a U-shaped average cost curve with a minimum ATC of $420. LG is considering adopting a limit price strategy to deter entry. What is the impact on LG's profits of a limit pricing strategy to keep out competition? Indicate the limit price profit (e) What do you suggest is the best strategy for LG to limit entry? Discuss. on your gtaph. dens

Answer 1

Answer a :-

Schedule of costs and revenues using the demand function :-

Quantity	Average Revenue	Total Revenue	Marginal Revenue	Marginal Cost	Average Cost	Total Cost
497	601.2	298796.4	402	400	400	198800
498	600.8	299198.4	401.2	400	400	199200
499	600.4	299599.6	400.4	400	400	199600
500	600	300000	399.6	400	400	200000
501	599.6	300399.6	398.8	400	400	200400
502	599.2	300798.4	398	400	400	200800

It must be noted that in a monopoly market the equilibrium quantity is where the Marginal Costs cuts the Marginal Revenue that is between 499 to 500 units . However the price are set at AR earned at that quantity .

Therefore the equilibrium quantity would be 499 units but the price would be 600.4 .

Yes , a person will buy even if the firm is charging such high prices because of no other option available in the market .

Answer b :-

The firm is earning super normal profits .

Super Normal Profit = (600.4-400)*499

=99,999.6

Answer c :-

AR 570 s60 SSO suo 5301 دي saol slot soof Revenue ugo 4800 니아 4607 4507 4407 430 42ot 410 --- Pence ceeling 400 390 a AC=MC a MR Ligh 49393 494 495.ga, 197 198 1999.500 104 goals sacl Quantitse 7 al

The area abcd represents the amount of supernormal profits earned by the firm .

Answer d :-

The price limiting strategy will reduce the super normal profits of the firm as now the new price cannot exceed $420 .

New profit margin = (420*400)*499=9980

Reduction in profits due to price limiting strategy = 99999.6-9980 =90019.6

Answer e :-

The best scheme for creating barriers to entry by dettering potential competitors from entering the market is predatory pricing method . In this method the existing firm uses the method of sharp price cuts to lower the market price of their goods thereby strengthening their consumer base in order to avoid competition in the market .