Question

Part A

A demand curve is P = 10- Q. So its MR is

A)5-2Q

B)10- 4Q

C)10 - Q

D)10 -2Q

Part B

A non- competitive firm's demand curve is P = 10- 2Q. So its MR is

A)5-2Q

B)10- 4Q

C)10 - Q

D)5 - Q

Part C

"If a firm with pricing power in the market faces a demand curve of P = 1800-2Q and marginal costs of MC = 200, how much is the equilibrium (profit maximizing) quantity?

A)360

B)400

C)560

D)620

Part D

"If a firm with pricing power in the market faces a demand curve of P = 1800-2Q and marginal costs of MC = 200, how much is the equilibrium (profit maximizing) price (P)?

A)$500

B)$750

C)$1000

D)$1250

Part E

"If a firm with pricing power in the market faces a demand curve of P = 1800-2Q and marginal costs of MC = 200, how much is the consumer surplus or net consumer value?

A)$160,000

B)$480,000

C)$560,000

D)$620,000

Answer 1

A. D)10 -2Q
(Total revenue, TR = P*Q = (10-Q)*Q = 10Q - (Q^2). So, Marginal revenue, MR = d(TR)/dQ = 10 - 2Q)

B. B)10- 4Q
(Total revenue, TR = P*Q = (10-2Q)*Q = 10Q - (2Q^2). So, Marginal revenue, MR = d(TR)/dQ = 10 - 4Q)

C. B)400
Profit is maximised at the point where MR = MC by a firm with pricing power
Total revenue, TR = P*Q = (1800-2Q)*Q = 1800Q - (2Q^2). So, Marginal revenue, MR = d(TR)/dQ = 1800 - 4Q
MR = MC gives 1800 - 4Q = 200
So, 4Q = 1800 - 200 = 1600
So, Q = 1600/4 = 400

D. C)$1000
P = 1800 - 2Q = 1800 - 2(400) = 1800 - 800 = 1000

E. A)$160,000
Maximum price possible (when Q = 0) is P = 1800 - 2Q = 1800 - 2(0) = 1800
Consumer surplus = (1/2)*(Maximum price-monopoly price)*(monopoly quantity) = (1/2)*(1800-1000)*(400) = 160,000