A firm in monopolistic competition produces athletic shoes. If it spends nothing

Question

A firm in monopolistic competition produces athletic shoes. If it spends nothing on advertising it can sell 100 pairs of shoes per day at a price of $180. For each $20 decrease in price, the quantity demanded increases by 100 pairs of shoes.

The firm's fixed cost is $1000 per day. Marginal cost and average variable cost are constant at $40 per of shoes produced. If the firm spends $2000 a day on advertising, it will increase the amount it can sell at each price level by 50%.

a) If the firms does not advertise, what is the profit maximizing output and price? How much profit is made? q*=___ pairs of shoes ; P*= $___ ; Profit= $___

b) If the does advertise, what is the profit maximizing output and price? How much profit is made? q*=___ pairs ; P*= $___ ; Profit = $___

c)Is it worthwhile for the firm to undertake the advertising campaign? Why or why not?

a) Yes. It's always better to advertise

b) Yes. They should advertise because it will increase Total Revenue

c) No. They shouldn't advertise because it will decrease profit

d) Yes. They should advertise because it will increase profit

e) No. THey should not advertise because it will increase Total Cost

f) No. It is never better to advertise

Explanation / Answer

A) quantity = 100 shoes, Price = $180, Profit = $13000

B) Quantity = 100 shoes, Price = $270, Profit = $20000

C) yes it is worthwhile for the firm because spending on advertising increases the profit

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