# B calculate the firms economic profits at this

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B. Calculate the firm’s economic profits at this activity level. Is this activity level sustainable in the long run?
Sample Short Answer Question 5 During recent years, MicroChips Corp. has enjoyed substantial economic profits derived from patents 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 = \$5500 - \$0.005Q MR = ∂TR/∂Q = \$5500 - \$0.01Q Fixed costs are nil because research and development expenses have been fully amortized during previous periods. Average variable costs are constant at \$4500 per unit. A. Calculate the profit-maximizing price/output combination and economic profits if MicroChips enjoys an effective monopoly because of patent protection. MC
B. Calculate the price/output combination and total economic profits that would result if competitors offer clones that make the market perfectly competitive.
P = MC = AVC \$5500 - \$0.005Q = \$4500 0.005Q = 1000 Q = 200,000 P = \$5500 - \$0.005(200,000) = \$4500 Economic Profits = P × Q - AVC × Q = \$4500(200,000) - \$4500(200,000) = \$0 In words, the transformation from monopoly to perfect competition has brought a \$1000 reduction in price and a 100,000 unit expansion in output. At the same time, economic profits have been eliminated.