Reference no: EM132460836

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].

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

b. 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.

c. Compare the total surplus created when the company operated as a monopoly to the total surplus created after the market became competitive.