The makers of Aspro pain reliever do a lot of advertising and have very loyal customers. In contrast, the makers of generic aspirin do no advertising and their customers shop only for the lowest price. Assume that the marginal costs of Aspro and generic aspirin are the same and constant.

a Draw a diagram showing Aspro’s demand, marginal-revenue and marginal-cost curves. Label Aspro’s price and mark-up over marginal cost.

b Repeat part

(a) for a producer of generic aspirin. How do the diagrams differ? Which company has the bigger mark-up? Explain.

c Which company has the bigger incentive for careful quality control? Why?