Question 1

At the monopolist's optimal amount of advertising,

Accepted Answer

The monopolist's optimal amount of advertising occurs where marginal benefit equals marginal cost. At this point, the benefits of advertising (such as increased demand and market power) are balanced with the costs of advertising (such as the cost of producing and airing advertisements). Therefore, the answer is B.

Question 2

A monopolist spent $450 in TV commercials. Such advertisement changed the monopolist inverse demand curve from p = 40 - q to p = 50 - q. The monopolist marginal cost is $4 and it has no fixed cost. The TV commercials

Accepted Answer

The answer of A monopolist spent $450 in TV commercials....

Question 3

A firm advertising using an expensive, famous spokesperson is often

Accepted Answer

Using a famous spokesperson is a strategy often employed to make a brand more appealing compared to its competitors, thereby attracting customers from those rivals.

Question 4

If identical firms sell an undifferentiated product, advertising is likely to be

Accepted Answer

Since the firms are selling undifferentiated products, it would not make sense for them to advertise against each other's products or focus on secret ingredients. Therefore, the industry group may collectively undertake advertising to promote the industry as a whole and attract more customers. Additionally, this collective advertising can also serve as a strategic tool to deter new entrants into the market.

Question 5

Explain why advertising that results in spuriously differentiated products may result in a deadweight loss to total welfare.

Accepted Answer

The answer of Explain why advertising that results in spuriously...

Question 6

Cigarette companies favored a ban on cigarette advertising.

Accepted Answer

The cigarette industry is an oligopoly and it is likely that most of the advertising was aimed at stealing customers from rivals. Therefore, joint profits are greater without advertising.

Question 7

A firm's advertising can help rivals

Accepted Answer

Advertising that focuses on a general problem can increase overall market demand or awareness for a type of product, which can indirectly benefit competitors by expanding the size of the market or making consumers more aware of the problem that these products solve.

Question 8

Under what conditions would firms be likely to support an industry-wide advertising ban?

Accepted Answer

The answer of Under what conditions would firms be likely...

Question 9

Since a monopoly faces no competitors, it need not advertise.

Accepted Answer

The monopoly benefits from advertising because advertising can shift the demand for its product rightward.

Question 10

A monopoly faces the following demand function: Q = 100 - p + sqrt(A), where A equals the dollar amount spent on advertising. If the cost function is A + 10 + 2Q, what are the profit-maximizing levels of price, output, and advertising? Compare this outcome to the case where the firm does not advertise at all.

Accepted Answer

The answer of A monopoly faces the following demand function:...

Question 11

Advertising for Milk and Beef is usually done by

Accepted Answer

Advertising for milk and beef is typically conducted by interest groups that represent the whole industry, such as the dairy board or beef associations, rather than by individual firms. These groups aim to promote the overall consumption of their products rather than the products of a single company.

Question 12

A monopolist has a marginal cost of $4 and no fixed cost. It faces the following inverse demand curve: p = 40 - q. The monopolist can introduce a new packaging for its product. Such new packaging does not alter the marginal cost. It makes the product more attractive for the consumer, and it would lead to a new inverse demand curve p = 40 - 0.5q. What is the maximum amount that the monopolist would be willing to invest in this new packaging project?

Accepted Answer

To find the maximum amount the monopolist would be willing to invest in the new packaging, we first calculate the profit before and after the introduction of the new packaging. The profit is given by $\pi = (P - MC) \times Q$, where $P$ is the price, $MC$ is the marginal cost, and $Q$ is the quantity.**Before the new packaging:**The inverse demand curve is $P = 40 - Q$. To maximize profit, set marginal revenue (MR) equal to marginal cost (MC). The marginal revenue curve can be derived from the demand curve and is $MR = 40 - 2Q$. Setting $MR = MC$:$$40 - 2Q = 4$$$$36 = 2Q$$$$Q = 18$$Substituting $Q = 18$ into the demand curve to find $P$:$$P = 40 - 18 = 22$$Profit before the new packaging is:$$\pi_{before} = (22 - 4) \times 18 = 18 \times 18 = 324$$**After the new packaging:**The new inverse demand curve is $P = 40 - 0.5Q$. The marginal revenue curve derived from this demand curve is $MR = 40 - Q$. Setting $MR = MC$:$$40 - Q = 4$$$$Q = 36$$Substituting $Q = 36$ into the new demand curve to find $P$:$$P = 40 - 0.5 \times 36 = 40 - 18 = 22$$Profit after the new packaging is:$$\pi_{after} = (22 - 4) \times 36 = 18 \times 36 = 648$$The maximum amount the monopolist would be willing to invest in the new packaging is the difference in profit:$$\pi_{after} - \pi_{before} = 648 - 324 = 324$$Therefore, the monopolist would be willing to invest up to $324 in the new packaging project.

Question 13

A monopolist has a marginal cost of $10 and no fixed cost. It faces the following inverse demand curve: p = 80 - q. The monopolist can engage in an advertising campaign that leads to a new inverse demand curve represented by p = 100 - q. What is the maximum amount that the monopolist is willing to spend in this campaign?

Accepted Answer

Under the original demand curve, the monopolist's profit-maximizing output q* is determined by equating marginal revenue to marginal cost:
MR = 80 - 2q* = MC = 10
Thus, q* = 35, and the corresponding price is p* = 80 - 35 = 45.
The monopolist's profit is (p* - MC) x q* = (45 - 10) x 35 = $1,225.
If the monopolist invests in advertising, the new demand curve implies that MR = 100 - 2q*. The monopolist will again equate MR to MC to determine the profit-maximizing output, q'. We have:
100 - 2q' = 10
Thus, q' = 45, and the corresponding price is p' = 100 - 45 = 55.
The monopolist's profit under the new demand curve is (p' - MC) x q' = (55 - 10) x 45 = $2,025.
The maximum amount that the monopolist is willing to spend on advertising is equal to the increase in profit due to advertising. In this case, the increase in profit is $2,025 - $1,225 = $800. Therefore, choice (B) is the correct answer.

Question 14

Advertising that has the fine print "professional driver on a closed course,"

Accepted Answer

This type of advertising is often used to showcase the capabilities or features of a product (like a car) in an appealing way, aiming to persuade viewers to make a purchase by demonstrating performance in a controlled, professional setting. The disclaimer "professional driver on a closed course" is used to inform viewers that the stunts or driving shown should not be attempted by an average driver, not to mislead or provide false information.

Question 15

The effect on total market demand from the advertising of a specific brand will

Accepted Answer

The advertising of a specific brand can often be positive for the total market demand. This is because advertising can create awareness and interest in the product, leading to increased demand not only for that brand but for similar products in the market. However, there can be cases where advertising may have a negative impact on market demand if the advertising is misleading or unethical.

Quiz 12: Pricing and Advertising