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 firm advertises, its maximum economic profit is
A) zero.
B) $800.
C) $1,200.
D) -$400.

Question

Quizplus · Accepted Answer

With advertising, the firm can sell 50% more books at each price. At $60 per book, it can sell 60 books without advertising, and 90 books with advertising. Revenue is $5,400 (90 books * $60). Total cost is $4,200 ($1,800 variable cost + $2,400 fixed cost + $1,200 advertising). Economic profit is $1,200 ($5,400 - $4,200).

A Textbook Publisher Is in Monopolistic Competition