Because of a patent, Company Y has a monopoly on a new product, which it brands Novo. Company Y is a profit-maximizing firm and is incurring economic losses in the short run. a. Draw a graph of Company Y's market for Novo.
i. Label the profit-maximizing price (Pm).
ii. Label the profit-maximizing quantity (Qm).
b. Shade the area of economic losses.
c. Why would Company Y continue to operate in the short run despite earning negative economic profit?
d. Assume that Pm = $6 and the average total cost at the profit-maximizing quantity is $8. If the firm is incurring $1,000 in economic losses, how many units of Novo is it producing?
e. On your graph from part (a), label the allocatively efficient price (Pe) and quantity (Qe).
f. Is Company Y producing in the elastic or inelastic range of its product's demand? Explain.
g. Based on the information from part (d), what is the total revenue of Company Y?
h. Assume that Company Y becomes able to perfectly price discriminate.
i. What would happen to its output?
ii. What would happen to economic surplus?