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
A) 120 books per day.
B) 80 books per day.
C) 160 books per day.
D) 100 books per day.

Question

Quizplus · Accepted Answer

When the firm spends nothing on advertising, its profit-maximizing level of output is 120 books per day. This is because at this output level, the marginal revenue from selling an additional book is equal to the marginal cost of producing that book. When the firm spends $1,200 a day on advertising, its profit-maximizing level of output increases to 160 books per day. This is because advertising increases the demand for the firm's books, which in turn increases the marginal revenue from selling an additional book.

A Textbook Publisher Is in Monopolistic Competition