A firm has a monopoly in the production of a software application in Europe. The demand schedule in Europe is Q1 = 120 - P, where Q1 is the amount sold in Europe when the price is P. The firm's marginal cost is 20.
a) What price would the firm choose if it wishes to maximize profits?
b) Now suppose the firm also receives a patent for the application in the United States. The demand for the application in the United States is Q2 = 240 - 2P, where Q2 is the quantity sold when the price is P. Because it costs essentially nothing to transport software over the Internet, the firm must charge the same price in Europe and the United States. What price would maximize the firm's profit?
c) Use the monopoly midpoint rule (Learning-By-Doing Exercise 11.5) to explain the relationship between your answers to parts (a) and (b).