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. Compared to the situation if it does not advertise, if the firm advertises, its economic profit A) increases by 400.
B) decreases by 400.
C) doubles.
D) is the same as with no advertising.
Question 2
There is a technological advance in a perfectly market. Which of the following statements is NOT true?
A) As more firms begin to use the new technology, the market supply increases and the price falls.
B) Technological change brings permanent gains to producers and temporary gains to consumers.
C) In the new long-run equilibrium, all the old-technology firms have exited.
D) In the long-run equilibrium, competition eliminates any short-run economic profit.
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