Question

Safe card Corporation offers a unique service. The company notifies credit card issuers after being informed that a subscriber's credit card has been lost or stolen. The Safecard service is sold to card issuers on an annual subscription basis. Relevant revenue and cost relations for the service are as follows:
TR = $5Q - $0.00001Q2
MR = ∂TR/∂Q = $5 - $0.00002Q
TC = $50,000 + $0.5Q + $0.000005Q2
MC = ∂TC/∂Q = $0.5 + $0.00001Q
Where TR is total revenue, Q is output measured in terms of the number of subscriptions in force, MR is marginal revenue, TC is total cost, including a risk-adjusted normal rate of return on investment, and MC is marginal cost.
A. If Safe card has a monopoly in this market, calculate the profit-maximizing price/output combination and optimal total profit.
B. Calculate Safe card’s optimal price, output, and profits if credit card issuers effectively exert monophony power and force a perfectly competitive equilibrium in this market.



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  • CreatedFebruary 13, 2015
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