Reference no: EM132507573

Point 1: Barnacle Industries was awarded a patent over 15 years ago for a unique industrial strength cleaner that removes barnacles and other particles from the hulls of ships. Thanks to its monopoly position, Barnacle has earned more than $160 million over the past decade. Its customers-spanning the gamut from cruise lines to freighters-use the product because it reduces their fuel bills. The annual (inverse) demand function for Barnacle's product is given by P = 220 -0.000006Q, and Barnacle's cost function is given by C(Q) = 200Q. Thanks to subsidies stemming from an energy bill passed by Congress nearly two decades ago, Barnacle does not have any fixed costs: The federal government essentially pays for the plant and capital equipment required to make this energy-saving product.

Point 2: Absent this subsidy, Barnacle's fixed costs would be about $9 million annually. Knowing that the company's patent will soon expire, Marge, Barnacle's manager, is concerned that entrants will qualify for the subsidy, enter the market, and produce a perfect substitute at an identical cost. With interest rates at 5 percent, Marge is considering a limit-pricing strategy.

Question 1: What would Barnacle's profits be if Marge pursues a limit-pricing strategy if the subsidy is in place?

Instructions: Enter your responses to the nearest penny (two decimal places).

Question 2: What would Barnacle's profits be if Marge convinces the government to eliminate the subsidy?

Question 3: What would be the profit of a new entrant if the subsidy is eliminated and Barnacle continues to produce the monopoly level of output?

Question 4: Which strategy is more beneficial to Barnacle?

1. Limit pricing
2. Eliminating the subsidy and continuing to produce the monopoly output