Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

A monopolist faces a demand curve given by Q = RA^0.5/p^2, where p is its price, A is its level of advertising and r is

A monopolist faces a demand curve given by Q = RA^0.5/p^2, where p is its price, A is its level of advertising and r is a positive constant. Advertising and output both cost the monopolist 1 per unit. The monopolist chooses price and advertising in order to maximise profit.

(a) Show that the monopolist chooses a price of p^m=2 (with output of Q= RA^0.5/4), an advertising of A^m = (R/8)^2, and a level of output given by Q^m= r^2/32.

(b) Bearing in mind the way the monopolists output changes with A (found in (a), find expressions for the monopolists profit and for consumer surplus, both as functions of advertising.

(c) Hence, calculate the level of advertising preferred by society and show that it is greater than one chosen by the monopolist

(d) state two factors that might overturn the 'over advertising' result in c.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

China's Air Pollution Problems

Authors: Claudio O Delang

1st Edition

1317209281, 9781317209287

More Books

Students also viewed these Economics questions

Question

1. What will happen in the future

Answered: 1 week ago

Question

3. Avoid making mistakes when reaching our goals

Answered: 1 week ago