A firm in monopolistic competition produces athletic shoes. If it spends nothing

Question

A firm in monopolistic competition produces athletic shoes. If it spends nothing on advertising it can sell 100 pairs of shoes per day at a price of $180. For each $20 decrease in price, the quantity demanded increases by 100 pairs of shoes. The firm's fixed cost is $1000 per day. Marginal cost and average variable cost are constant at S40 per pair of shoes produced. If the firm spends S2000 a day on advertising, it will increase the amount it can sell at each price level by 50% a) If the firm does not advertise, what is the profit maximizing output and price? How much profit is made? We did part a in class b) If the firm does advertise, what is the profit maximizing output and price? How much profit is made? q.-pairs of shoes; P.-Profit-s[ ] c) Is it worthwhile for the firm to undertake the advertising campaign? Why or why not? A. Yes. They should advertise because it will increase Total Revenue. O B. Yes. It is always better to advertise O C. No. They should not advertise because it will decrease profit. ( D. No. They should not advertise because it will increase Total Cost. O E. No. It is never better to advertise. ° F. Yes. They should advertise because it vil increase profit.

Explanation / Answer

Let's see both scenarios if the firm does advertising and didn't do advertising. IF they do ad their sales is increased by 50% at a given cost. So at the cost of $160 total amount sold were 200 and after advertising, it will increase to 300.

If the firm does advertising its fixed cost per day will $3000. ($2000 + $1000) and the variable cost will be ($40 x 300) 12000. The total cost incurred will be $15,000. Revenue earned by the firm after selling 300 pairs of shoes at a cost of $160 will be $48,000. Net profit earned will be $48,000 - 15,000 = $33,000.

Taking another scenario into account when the firm didn't advertise, they are selling only 200 pairs of shoes at a price of $160 and making a revenue of $32,000. their cost incurred in the process will be (FC + VC) 1000 + 8000 =$9000. Total profit was $32,000 - $9,000 = $23,000.

The firm should definitely advertise.

After advertisement, they will be selling 300 pairs of shoes at a price of $160. and making a profit of $33,000.

3) They should advertise because that will increase their profit (not revenue).

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