21 Jul WHAT WOULD BARNACLES PROFITS BE IF MARGE PURSUES A LIMIT-PRICING STRATEGY IF THE SUBSIDY IS IN PLACE?
Barnacle Industries was awarded a patent over 15 years ago for a unique industrial strength cleaner Show more 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 customersspanning the gamut from cruise lines to freightersuse the product because it reduces their fuel bills. The annual (inverse) demand function for Barnacles product is given by P = 280 -0.00005Q and Barnacles cost function is given by C(Q) = 230Q. 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 Barnacles fixed costs would be about $7 million annually. Knowing that the companys patent will soon expire Marge Barnacles 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 Barnacles profits be if Marge pursues a limit-pricing strategy if the subsidy is in place? $ Instruction: Round all answers to the nearest penny (two decimal places). What would Barnacles profits be if Marge convinces the government to eliminate the subsidy? $ What would be the profit of a new entrant if the subsidy is eliminated and Barnacle continues to produce the monopoly level of output? $ Which strategy is more beneficial to Barnacle? Eliminating the subsidy and continuing to produce the monopoly output Limit pricing Show less
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