Reference no: EM131101772
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 byP = 420 -0.00005Q, and Barnacle's cost function is given byC(Q) = 350Q. 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.
Absent this subsidy, Barnacle's fixed costs would be about $7 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 6 percent, Marge is considering a limit-pricing strategy.
What would Barnacle's profits be if Marge pursues a limit-pricing strategy if the subsidy is in place?
$
Instruction: Round all answers to the nearest penny (two decimal places).
What would Barnacle's profits be if Marge convinces the government to eliminate the subsidy?
$
What would be the profit of a new entrant if the subsidy is eliminated and Barnacle continues to produce the monopoly level of output?
$
Which strategy is more beneficial to Barnacle?
Eliminating the subsidy and continuing to produce the monopoly output
Limit pricing
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