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=480 - 0.00006Q, and Barnacle's cost function is given by C(Q) = 390 Q. 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 $9 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? $ Instructions: Enter your responses 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 the subsidy is eliminated and Barnacle continues to produce the monopoly level of output? $ Which strategy is more beneficial to Barnacle? O Eliminating the subsidy and continuing to produce the monopoly output O Limit pricing
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=480 - 0.00006Q, and Barnacle's cost function is given by C(Q) = 390 Q. 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 $9 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? $ Instructions: Enter your responses 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 the subsidy is eliminated and Barnacle continues to produce the monopoly level of output? $ Which strategy is more beneficial to Barnacle? O Eliminating the subsidy and continuing to produce the monopoly output O Limit pricing
Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)
14th Edition
ISBN:9781305506381
Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Chapter16: Government Regulation
Section: Chapter Questions
Problem 6E
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Step 1: Limit Pricing strategy and subsidy
VIEWStep 2: Bernacle's profit if Merge pursues limit Pricing strategy if the subsidy is in place
VIEWStep 3: Bernacle's profit if Merge convinces the government to eliminate the subsidy
VIEWStep 4: Profit of new entrant if subsidy is eliminated and continue to monopoly market
VIEWStep 5: Evaluation of the problem
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