A textbook publisher is in monopolistic competition.If the firm spends nothing on advertising,it can sell no books at $100 a book,but for each $10 cut in price,the quantity of books it can sell increases by 20 books a day.The firm's total fixed cost is $2,400 a day.Its average variable cost and marginal cost is a constant $20 per book.If the firm spends $1,200 a day on advertising,it can increase the quantity of books sold at each price by 50 percent.If the publisher advertises,its profit maximizing level of output is

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The profit-maximizing level of output is where marginal revenue equals marginal cost. With advertising, the marginal revenue curve shifts up by 50%, so the profit-maximizing level of output will be higher than without advertising. The marginal cost curve is constant at $20 per book, so the profit-maximizing level of output will be where marginal revenue equals $20. The marginal revenue curve is equal to the change in total revenue divided by the change in quantity, so the marginal revenue curve is equal to the price minus the change in price times the change in quantity. With advertising, the change in price times the change in quantity is equal to $10 times 50% of 20 books, or $10. So the marginal revenue curve is equal to the price minus $10. Setting the marginal revenue curve equal to $20, we get:Price - $10 = $20Price = $30So the profit-maximizing level of output is where the price is $30. With advertising, the quantity of books sold at each price increases by 50%, so the profit-maximizing level of output is 120 books per day.

A Textbook Publisher Is in Monopolistic Competition