A monopolist chooses price and advertising to maximize profits. Demand is given by y(p )= 200-0.25p+ 0.05A^(0.5) where y is the quantity of output sold, p is the price of per unit of output, and A is the number of advertising messages. The marginal production cost is $2 and the cost per unit of advertising is $1. Profits are given by (p) = (p 2)y(p) A.

a) Find the choices of p and A that maximize profits.

b) Calculate the price elasticity || and the advertising elasticity at the equilibrium.

c) Verify that the Dorfman-Steiner condition holds (.., / = || / ).

d) Interpret this condition intuitively.