Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text: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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