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 = 400 – .0005Q, and Barnacle’s cost function is given by C(Q) = 250Q. 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 $4 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 7 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?

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


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


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Which strategy is more beneficial to Barnacle?

• Limit pricing

• Eliminating the subsidy and continuing to produce the monopoly output

Answer 1

1) The limit price is below the short run profit maximizing price but above the competitive level b, limit pricing hear means a short run departure from the maximization of the profit , if succesfull, Barnacle can maintain monopoly position and can make higher profits.

2) If subsidy is got eliminated then Barnacle's profit will be very less as the firm will incur the fixed costs.

3) When the subsidy gets eliminated then the profits pf the new entrant will be alos less as fixed costs will have to incurred.

4) Barnacle can retain its monopoly position and maximise profits