Suppose a monopoly market has a demand function in whichquantity demanded depends not only on market price (P) butalso on the amount of advertising the firm does (A, measuredin dollars). The specific form of this function isQ =(20 - P2) (1 + 0.1A - 0.01A2).The monopolistic firm’s cost function is given byC = 10Q + 15 + A.a. Suppose there is no advertising (A = 0). What outputwill the profit-maximizing firm choose? What market price will this yield? What will be the monopoly’sprofits?b. Now let the firm also choose its optimal level of advertising expenditure. In this situation, what output levelwill be chosen? What price will this yield? What will thelevel of advertising be? What are the firm’s profits in thiscase? Hint: This can be worked out most easily by assuming the monopoly chooses the profit-maximizing pricerather than quantity.
Suppose a
quantity demanded depends not only on market
also on the amount of advertising the firm does (A, measured
in dollars). The specific form of this function is
Q =(20 - P2) (1 + 0.1A - 0.01A2).
The monopolistic firm’s cost function is given by
C = 10Q + 15 + A.
a. Suppose there is no advertising (A = 0). What output
will the profit-maximizing firm choose? What market price will this yield? What will be the monopoly’s
profits?
b. Now let the firm also choose its optimal level of advertising expenditure. In this situation, what output level
will be chosen? What price will this yield? What will the
level of advertising be? What are the firm’s profits in this
case? Hint: This can be worked out most easily by assuming the monopoly chooses the profit-maximizing price
rather than quantity.
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