At the monopolist's optimal amount of advertising,
A) the marginal benefit of advertising exceeds the marginal cost of advertising.
B) the marginal benefit of advertising is equal to the marginal cost of advertising.
C) the marginal benefit of advertising is two times smaller than the marginal cost of advertising.
D) the marginal benefit of advertising is at least five times smaller than the marginal cost of advertising.

Question

Quizplus · Accepted Answer

At the monopolist's optimal amount of advertising, marginal benefit and marginal cost are equal. This is because the monopolist will continue to advertise as long as the additional revenue generated by advertising (marginal benefit) exceeds the additional cost of advertising (marginal cost). Once the two are equal, there is no benefit in advertising more as the cost outweighs the additional revenue. Therefore, the optimal amount of advertising is when MB=MC.

At the Monopolist's Optimal Amount of Advertising