Question: Gray Computer, Inc., located in Colorado Springs is a producer of high-speed electronic supercomputers with immense storage capacity and computing capability. The company has profitably exploited its market niche by renting out storage space to industrial users and a few large government agencies (e.g., Department of Health, NASA, National Weather Service, etc.). Suppose a potential entrant into the market for supercomputers has asked you to evaluate the potential for this market. The following market demand and cost information has been developed for Gray Computer, Inc.:

P = $54 - $1.5Q,

TC = $200 + $6Q + $0.5Q²,

where P is the market price, Q is units measured by the number of supercomputers rented, per year, MR is marginal revenue, TC is total costs including a normal rate of return (assume that it is possible to rent out a fraction of a computer).

a. Assuming that the demand and cost data above are descriptive of Gray’s historical experience. Calculate output, price, markup percent, contribution margin percent and economic profits earned by Gray Computer as a monopoly. What is the point price elasticity of demand at this output level?

b. If your company decided to enter the market for supercomputer if would face a total cost function that has been determined to be:

TC_B = 100 + 14Q_B +1.5Q_B².

Also, if your company entered the market, it would have to compete based on a Cournot duopolist model. Assuming that the market demand would not change and that no other near-term entrants are anticipated, would you recommend that your company enter the market for supercomputers? Support your recommendation with information about the level of output and profits that would be generated by this venture.