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. The firm will

Question

Quizplus · Accepted Answer

Advertising increases the quantity sold at each price by 50%, which increases total revenue more than the cost of advertising, thus increasing economic profit.

A Textbook Publisher Is in Monopolistic Competition