Monopolistically competitive firm prices its product using the markup pricing formula P = 1.25MC, where MC is the marginal cost of producing an additional unit. Suppose the demand for the firm's product is given by Q = 2000 - 0.1P, so the revenue from selling Q units of the product is PQ = 2000P - 0.1P2.
(a) If the marginal cost of producing each unit of the product is $10,000, calculate the price of the product, the quantity produced, and the firm's revenues, costs, and profits.
(b) Now suppose the marginal cost rises to $11,000. The firm can keep the price of the product unchanged, or it can change the product's price at a total cost of $700,000. Calculate the price, quantity, revenues, costs, and profits as in part (a) both for changing the price and leaving the price unchanged. Should the firm change the price of its product?