Problem: MicroChips Corp has enjoyed substantial economic profits derived from patients covering a wide range of inventions and innovations for microprocessors used in high performance desktop computers. A recent introduction, the Penultimate has proven especially profitable. Market demand and marginal revenue relations for the product are as follows:
P = $5,500 - $0.005Q
MR = change TR/change Q = $5,500 -$0.01Q
Fix cost are nil because research and development expenses have been fully amortized during previous periods. Average variable cost are constant at $4,500 per unit.
Q1. Calculate the profit-maximizing price output combination and economic profits if Microchips enjoys an effective monopoly because of patent protection.
Q2. Calculate the price-ouptut combination and total economic profits that would result if competitors offer clones that make the market perfectly competitive.