Bawa Selesa Bhd, has enjoyed substantial economic profit derived from patents covering the manufacturing of a special shock absorber. Market demand and marginal revenue relations for the shock absorber are:
P=5000-0.05Q MR = MTR/MQ = 5000 -0.1Q
Fixed costs are nil, because research and development expenses have been fully amortized during previous periods. Average variable costs are constant at RM4, 000 per unit
a) Calculate the profit-maximizing price/output combination and economic profits if Bawa Selesa enjoys an effective monopoly on the shock absorber market due to its patent protection
b) Calculate the price/output combination and total economic profits that would result if competitors offer clones that make the shock absorber market perfectly competitive and explain the outcome.