Author Question: Suppose a monopolist is considering starting a 500,000 advertising campaign. The current demand for ... (Read 114 times)

LaDunn · **on:** Jul 1, 2018

Suppose a monopolist is considering starting a 500,000 advertising campaign. The current demand for its product is given by

p = 150 - 3Q
where Q is the quantity of output in thousands. If the monopolist undertakes the advertising campaign, it expects demand to increase to
p = 200 - 4Q
The (non-advertising) cost for the monopolist is C(Q) = 30Q.
a. Determine whether the monopolist should undertake the advertising campaign assuming that it is correctly anticipating the potential increase in demand.
b. What is the most the monopolist will invest towards this advertising campaign?

Question 2

Which of the following conditions must be TRUE so that a firm can profitably price discriminate?

A) The firm must be able to identify individual or groups of consumers with different demand curves.
B) The firm must be able to identify how its consumers' demand curves differ.
C) The good cannot be easily resold.
D) All of the above.

sarah_brady415 · **Reply #1 on:** Jul 1, 2018

Answer to Question 1

a. The monopolist's profits without advertising are calculated by:
150 - 6Q = 30
Q = 20
Pi = 20 90 - 30 20 = 1200
By advertising, the gross profit will be:
200 - 8Q = 30
Q = 21.25
Pi = 1806.25
Because the profit rises by more than 500,000, the monopolist will advertise.
b. The difference in gross profits is 606,250, the maximum the monopolist will invest.

Answer to Question 2

D