Question

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.​

a. What would Barnacle's profits be if Marge pursues a limit-pricing strategy if the subsidy is in place? $_____

b. What would Barnacle's profits be if Marge convinces the government to eliminate the subsidy? $_____

c. What would be the profit of a new entrant if the subsidy is eliminated and Barnacle continues to produce the monopoly level of output? ______

d. Which strategy is more beneficial to Barnacle? choose from the following

i.Eliminating the subsidy and continuing to produce the monopoly output or

ii. Limit pricing

Answer 1

1.The limit price is below the short run profit maximising price but above the competitive level b. Limit pricing means a short run departure from profit maximisation. If successful, Barnacle can maintain monopoly position and make higher profits in the long term.

2. If subsidy is eliminated then Barnacle's profit will be lesser as the firm will incur fixed costs

3, When the subsidy is eliminated the profits of the new entrant will also be less as fixed costs will have to incurred. Barnacle will be producing at an output where MC=MR.

4. Limit Pricing is a better strategy as it will disuade new entrants and Barnacle can retain its monopoly position and maximise profits in the long run.