Question

1. Amanda Enterprises Inc. (AEI) is a profit-maximizing firm. It has a patent for a unique smartphone application called Pandagram.

Answer 1

d. The profit maximizing point is where MR=MC. At this level highest price is charged - Pm and quantity is the lowest at Qm. Here the firm earns super normal profits as AR>AC. When firm earns normal profits, it implies that the firm break evens at Pn and Qn where AR=AC.

e. The firm will maximize revenue when change in TR with change in Q (MR) will be zero. When MR is positive, there is scope to increase revenues while when MR is negative - TR will decline. So at MR=0, price is Pr and quantity is Qr.

f. So for a monopoly firm, the elasticity of the demand curve determines the level of profit it earns. When it earns supernormal profits, then it produces on upper part of the demand curve - when demand is elastic and MR is positive. When MR falls and become negative, point of production goes to inelastic portion of the demand. However when TR is maximized at MR = 0, then that prodcution point Qr is at the mid point of the demand curve and the elasticity is unit elastiic.

g. When the patent expires, the firm looses monopoly power. More firms are able to enter the market now. In the long run prices fall and the supernormal profits gets eaten away. In the long run, the firm earns normal profits at Pn price and Qn quantity.