If a firm in a monopolistically competitive industry is profit maximizing,it should choose its level of advertising such that the marginal revenue of an additional dollar of advertising:

Question

Quizplus · Accepted Answer

In a monopolistically competitive market, firms can differentiate their products through advertising, which means that the elasticity of demand for their product is affected by their advertising. As a result, the optimal level of advertising can be determined by equating the marginal revenue of advertising to its marginal cost. Since the marginal cost of advertising in this case is $1, the marginal revenue of advertising should also be $1 to maximize profits. However, since the impact of advertising on demand is proportional to the elasticity of demand, the marginal revenue of advertising should be equal to the elasticity of demand. Therefore, the answer is E.

If a Firm in a Monopolistically Competitive Industry Is Profit