A firm produces a single product whose quality is either high or low (the firm knows the quality but cannot choose it) and sells it to consumers in each of two periods. The marginal cost of production is 4 if quality is high and 3 if quality is low. In each period there are N consumers, each of whom is interested in buying at most one unit in each period and is willing to pay 10 if quality is high and 5 if quality is low. However, consumers cannot tell the product’s quality before they consume it in period 1. Suppose that the firm can advertise its product on TV in period 1. Although advertising itself does not convey direct information about the product’s quality, it can serve as a signal - consumers might be able to infer the product’s quality from the fact that the firm was willing to spend money on advertising. Suppose that the cost of a TV ad is A if quality is low and α A if quality is high, where α < 1 (e.g., it is cheaper to design an ad for a high quality product). The intertemporal discount factor isδ.

1. What is the minimum amount of TV ads that the firm needs to sponsor in order to signal that its product's quality is high?

2. How does your answer depend on the discount factor δ? How does it depend on α? How does it depend on N? Explain your answer in detail.