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. Compared to the situation if it does not advertise, if the firm advertises, its economic profit

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Quizplus · Accepted Answer

Advertising increases the quantity sold by 50%, which increases revenue more than the cost of advertising, leading to an increase in economic profit by $400.

A Textbook Publisher Is in Monopolistic Competition