Author Question: A monopoly faces the following demand function: Q = 100 - p + sqrt(A ), where A equals the dollar ... (Read 66 times)

cookcarl

  • Hero Member
  • *****
  • Posts: 539
A monopoly faces the following demand function: Q = 100 - p + sqrt(A ), where A equals the dollar amount spent on advertising. If the cost function is A + 10 + 2Q, what are the profit-maximizing levels of price, output, and advertising? Compare this outcome to the case where the firm does not advertise at all.
 
  What will be an ideal response?

Question 2

An incumbent announces it will significantly increase output in the next period, but only has contracts for the amount produced this period. The announcement is a
 
  A) credible threat.
  B) non-credible threat.
  C) commitment.
  D) mixed strategy.


cswans24

  • Sr. Member
  • ****
  • Posts: 317
Answer to Question 1

(1 )  = (100 - Q + sqrt(A ))Q - 10 - 2Q - A
(2 ) /Q = 100 - 2Q + sqrt(A ) - 2 = 0
(3 ) /A = Q/2sqrt(A ) - 1 = 0
From (3 ), sqrt(A ) = Q/2. Substituting into (2 ) and rearranging yields Q = 65.33. So, A = 1067.32 and p = 67.33. Total revenue is (65.33  67.33 ) = 4398.67. Total costs = (10 + 2(65.33 ) + 1067.32 ) = 1207.98. Profit equals 3190.69.
Without advertising, set A = 0 in equation (2). This yields Q = 49 and p = 51. Total revenue equals 2499; total cost equals 108. Profit equals 2391. The firm is better off advertising.

Answer to Question 2

B



Related Topics

Need homework help now?

Ask unlimited questions for free

Ask a Question
 

Did you know?

A headache when you wake up in the morning is indicative of sinusitis. Other symptoms of sinusitis can include fever, weakness, tiredness, a cough that may be more severe at night, and a runny nose or nasal congestion.

Did you know?

When taking monoamine oxidase inhibitors, people should avoid a variety of foods, which include alcoholic beverages, bean curd, broad (fava) bean pods, cheese, fish, ginseng, protein extracts, meat, sauerkraut, shrimp paste, soups, and yeast.

Did you know?

Amoebae are the simplest type of protozoans, and are characterized by a feeding and dividing trophozoite stage that moves by temporary extensions called pseudopodia or false feet.

Did you know?

On average, the stomach produces 2 L of hydrochloric acid per day.

Did you know?

Inotropic therapy does not have a role in the treatment of most heart failure patients. These drugs can make patients feel and function better but usually do not lengthen the predicted length of their lives.

For a complete list of videos, visit our video library