Suppose there are two firms in a market, eachwith marginal costs equal to 0. Due toregulations, the firms must both charge aprice of $0. Let Al and A2 be the advertisingexpenditure of each firm, and let the demandfor the ith firm be qi=6-3(Aj/Ai)a) Assume firms choose their advertisingexpenditures simultaneously, and calculatethe firm's advertising expenditures inequilibrium.b) Now, assume the firms can commit toadvertising at the same level (so thatA1=A2=A). Does your answer to (a) imply thatthere is too much or too little advertising(from the perspective of firm profits)?

A market is a dynamic area wherein buyers and dealers interact to change goods, offerings, or…

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ENGR.ECONOMIC ANALYSIS

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ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

Suppose there are two firms in a market, each
with marginal costs equal to 0. Due to
regulations, the firms must both charge a
price of $0. Let Al and A2 be the advertising
expenditure of each firm, and let the demand
for the ith firm be qi=6-3(Aj/Ai)
a) Assume firms choose their advertising
expenditures simultaneously, and calculate
the firm's advertising expenditures in
equilibrium.
b) Now, assume the firms can commit to
advertising at the same level (so that
A1=A2=A). Does your answer to (a) imply that
there is too much or too little advertising
(from the perspective of firm profits)?

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Step 3: Explain that there is too much or too little advertising (from the perspective of firm profits)

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