Question

The revenue-maximizing level of output for a monopoly firm is 20 units. If the marginal revenue of the first unit sold is Rs 60, what is the maximum total revenue?

• A. Rs 300
• B. Rs 600
• C. Rs 900
• D. Rs 1200

Answer 1

The correct option is B

Rs 600

Given that when q=0, MR =60. When revenue is maximized, q=20 and MR=0.

Hence, the MR curve is given by the equation
$MR=60-3q$
The slope of the MR curve is -3. Since the MR curve is twice as steep as the demand curve, the slope of the demand curve is -1.5.
Also, MR and demand curves start from the same point. Hence the equation of the demand curve is
$p=60-1.5q$

TR is maximum when MR=0 i.e when q=20
Hence, TR is maximized at an output level of 20.

At q=20, the maximum price that the firm can set can be obtained from the demand curve
$p=60-1.5\times 20=Rs30$

$TR=p\times q=30\times 20=Rs600$