Shower Power, Inc., a firm in monopolistic competition, produces shower radios. The company's economists know that it if it does not advertise, it can sell no radios at $80, and for each $10 cut in price, the quantity of radios it can sell increases by 50 a day. This relationship continues to hold until the price falls to $20. The firm's total fixed cost is $3,000 a day. Its marginal cost is constant at $20 per radio. Shower Power's economists have determined that if the firm spends $3,500 a day on advertising, it can double the quantity of radios sold at each price.
a) Draw the new demand curve faced by the firm and its new marginal revenue curve. Also draw Shower Power's marginal cost and average total cost curves.
b) If Shower Power does not advertise, what quantity of radios sold maximizes its profit? What is the profit-maximizing price? What is the firm's economic profit?
c) If Shower Power does advertise, what quantity of radios sold maximizes its profit? What is the profit-maximizing price? What is the maximum economic profit that the firm can make on its shower radios? Draw a diagram to show the effects of advertising.
d) Will Shower Power advertise? Why or why not?

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The Answer of Shower Power, Inc., a firm in monopolistic competition, produces shower radios. The company's economists know that it if it does not advertise, it can sell no radios at $80, and for each $10 cut in price, the quantity of radios it can sell increases by 50 a day. This relationship continues to hold until the price falls to $20. The firm's total fixed cost is $3,000 a day. Its marginal cost is constant at $20 per radio. Shower Power's economists have determined that if the firm spends $3,500 a day on advertising, it can double the quantity of radios sold at each price.
a) Draw the new demand curve faced by the firm and its new marginal revenue curve. Also draw Shower Power's marginal cost and average total cost curves.
b) If Shower Power does not advertise, what quantity of radios sold maximizes its profit? What is the profit-maximizing price? What is the firm's economic profit?
c) If Shower Power does advertise, what quantity of radios sold maximizes its profit? What is the profit-maximizing price? What is the maximum economic profit that the firm can make on its shower radios? Draw a diagram to show the effects of advertising.
d) Will Shower Power advertise? Why or why not?