Western University Microeconomic Policy Ch. 3 Practice Questions with answers

Microeconomic Policy
Practice Questions
Monopoly
11.12 a) With demand 
P Q   210 4 , MR Q   210 8
. Setting 
MR MC 
implies
210 8 10
25
Q
Q
 

With 
Q  25
, price will be 
P Q    210 4 110
. At this price and quantity total 
revenue will be 
TR   110(25) 2,750.
b) If 
MC  20
, then setting 
MR MC 
implies
210 8 20
23.75
Q
Q
 

At 
Q  23.75
, price will be 
P 115
. At this price and quantity total revenue will 
be 
TR   115(23.75) 2,731.25
. Therefore, the increase in marginal cost will 
result in lower total revenue for the firm.
c) Competitive firms produce until P = MC, so in this case we know the market 
price would be P = 10 and the market quantity would be:
210 4 10
50
Q
Q
 

d) In this case, the market price will be
P MC 
= 20, implying that the industry 
quantity is given by
210 4 20
47.50
Q
Q
 

At this quantity, price will be 
P  20
. When 
MC 10
, total industry revenue is
10(50) 500 
. With 
MC  20
, total industry revenue is 
20(47.50) 950 
. Thus, 
total industry revenue increases in the perfectly competitive market after the 
increase in marginal cost