*Refer to the attached images*

Good day, tutor!Kindly help me understand this lesson. I have to report the following subtopics (seen in the attached images):

• Innovation and Product Development - Profit-Maximizing Product Innovation
• Advertising - Advertising Expenditures - Selling Costs and Total Costs - Selling Costs and Demand

*No need to explain the two figures and the Cost of Selling a Pair of Shoes*

Please explain it in detail to me as simply as you can. Thank you!

330 CHAPTER l4 Monopolistic Competition Product Development and Marketing When Nautica made its price and output decision that we've just studied, it had already made its prod- uct quality and marketing decisions. We're now going to look at these decisions and see how they inuence the firm's output, price, and economic profit. Innovation and Product Development The prospect of new firms entering the industry keeps firms in monopolistic competition on their toes! To enjoy economic prots, they must continually seek ways of keeping one step ahead of imitatorsother firms who imitate the success of profitable rms. One major way of trying to maintain economic profit is for a firm to seek out new products that will provide it with a competitive edge, even if only temporarily. A firm that introduces a new antl dif- ferentiated product faces a demand that is less elas- tic and is able to increase its price and make an economic profit. Eventually, imitators will make close substitutes for the innovative product and compete away the economic profit arising from an initial advantage. So to restore economic profit, the firm must again innovate. ProiirMaximizing Product Innovation The decision to innovate and develop a new or improved product is based on the same type of profit-maximizing calcu- lation that you've already studied. Innovation and product development are costly activities, but they also bring in additional revenues. The firm must balance the cost and revenue at the margin. The marginal dollar spent on developing a new or improved product is the marginal cost of product development. The marginal dollar that the new or improved product earns for the firm is the marginal revenue of product development. At a low level of product development, the marginal revenue from a better product exceeds the marginal cost. At a high level of product development, the marginal cost of a better product exceeds the marginal revenue. When the marginal cost and marginal revenue of product development are equal, the firm is under- taking the profit-maximizing amount of product development. Efficiency and Product Innovation Is the profitmaxi mizing amount of product innovation also the effi cient amount? Efciency is achieved if the marginal social benefit ofa new and improved product equals its marginal social cost. The marginal social benefit of an innovation is the increase in price that consumers are willing to pay for it. The marginal social cost is the amount that the firm must pay to make the innovation. Profit is maxi mized when marginal revenge equals marginal cost. But in monopolistic competition, marginal revenue is less than price, so product innovation is probably not pushed to its efficient level. Monopolistic competition brings many product innovations that cost little to implement and are purely cosmetic, such as new and improved packag ing or a new scent in laundry powder. And even when there is a genuine improved product, it is never as good as what the consumer is willing to pay for. For example, \"The Legend of Zelda: Twilight Princess\" is regarded as an almost perfect and very cool game, but users complain that it isn't quite per fect. It is a game whose features generate a marginal revenue equal to the marginal cost of creating them. Advertising A firm with a differentiated product needs to ensure that its customers know how its product is different from the competition. A firm also might attempt to create a consumer perception that its product is dif ferent from its competitors, even when that differ ence is small. Firms use advertising and packaging to achieve this goal. Advertising Expenditures Firms in monopolistic competition incur huge costs to ensure that buyers appreciate and value the differences between their own products and those of their competitors. So a large proportion of the price that we pay for a good covers the cost ofsclling it, and this proportion is increasing. Advertising in newspapers and magazines and on radio, television, and the Internet is the main selling cost. But it is not the only one. Selling costs include the cost of shopping malls that look like movie sets, glossy catalogs and brochures, and the salaries, airfares, and hotel bills ofsalcspcoplc. Advertising expenditures affect the prots of firms in two ways: They increase costs, and they change demand. Let's look at these effects. Economics in Action The Cost of Selling a Pair of Shoes When you buy a pair of running shoes that cost you $70, you're paying $9 for the materials from which the shoes are made, $2.75 for the services of the Malaysian worker who made the shoes, and $5.25 for the production and transportation services of: a man ufacturing firm in Asia and a shipping company. These numbers total $17. You pay $3 to the U.S. government in import duty. So we've now accounted for a total of $20. Where did the other $50 go? It is the cost of advertising, retailing, and other sales and distribution services. The selling costs associated with running shoes are not unusual. Almost everything that you buy includes a selling cost component that exceeds one half of the total cost. Your clothing, food, electronic items, DVDs, magazines, and even your textbooks cost more to sell than they cost to manufacture. Advertising costs are only a part, and often a small part, of total selling costs. For example, Nike spends about $4 on advertising per pair of running shoes sold. For the U.S. economy as a whole, there are some 20,000 advertising agencies, which employ more than 200,000 people and have sales of $45 billion. These numbers are only part of the total cost of advertising because rms have their own internal advertising departments, the costs of which we can only guess. But the biggest part of selling costs is not the cost of advertising. It is the cost of retailing services. The retailer's selling costs (and economic profit} are often as much as 50 percent of the price you pay. Raw Prod uctian Import Selling materials costs duty costs $0 $ 3 $3 $ 5 0 Product Development and Marketing 331 Selling Costs and Total Cost Selling costs are fixed costs and they increase the firm's total cost. 50 like the fixed cost of producing a good, advertising costs per unit decrease as the quantity produced increases. Figure 14.5 shows how selling costs change a iirm's average total cost. The blue curve shows the average total cost of production. The red curve shows the firm's average total cost of production plus advertising. The height of the red area between the two curves shows the average fixed cost of advertising. The tom! cost ofadver tising is xed. But the average cost of advertising decreases as output increases. Figure 14.5 shows that if advertising increases the quantity sold by a large enough amount, it can lower average total cost. For example, if the quantity sold increases from 25 jackets a day with no advertising to 100 jackets a day with advertising, average total cost falls from $60 to $40 a jacket. The reason is that although the mm! fixed cost has increased, the greater xed cost is spread over a greater output, so average total cost decreases. . FIGURE 14.5 Selling Costs and Total Cost 100 ' By increasing the quantity bought, advertising can 80 _ lower average Average total cost total cost with advertising Cast [dollars per Nautica 'acket] 00 IIIII Advertising Coil 40 ______ ________ , ........ 1 20 _ | Average total cost II with no advertislng l i I ' l I I O 25 50 100 LED 200 2.50 Quantity {Nautica iackets per day) Selling costs such as the cost of advertising are fixed costs. When added to the average total cast of production, selling costs increase average total cost by a greater amount at small outputs than at large outputs. Ii advertising enables sales to increase from 25 iackets a day to lDO loci-tets a day, average total cost falls from $60 to $40 a iacket. t'tug-reconlab animation 9 332 CHAPTER IA Monopolistic Competition Selling Costs and Demand Advertising and other selling efforts change the demand for a firm's prod uct. But how? Does demand increase or does it decrease? The most natural answer is that advertising increases demand. By informing people about the quality of its products or by persuading people to switch from the products of other firms, a firm might expect to increase the demand for its own products. But all firms in monopolistic competition adver tise, and all seek to persuade customers that they have the best deal. If advertising enables a firm to survive, the number of firms in the market might increase. And to the extent that the number of firms does increase, advertising decreases the demand faced by any one firm. It also makes the demand for any one Hrm's product more elastic. So advertising can end up not only lowering average total cost but also lowering the markup and the price. Figure 14.6 illustrates this possible effect of adver tising. in part (a), with no advertising, the demand for Nautica jackets is not very elastic. Profit is maxi mized at 75 jackets per day, and the markup is large. In part (b), advertising, which is a fixed cost, increases average total cost from ATCO to ATCI but leaves marginal cost unchanged at M C . Demand becomes much more elastic, the profitmaximizing quantity increases, and the markup shrinks. Using Advertising to Signal Quality Some advertising, like the Ashton Kutcher Nikon Coolpix ads on television or the huge number of dol lars that Coke and Pepsi spend, seems hard to under stand. There doesn't seem to be any concrete information about a camera in an actor's glistening smile. And surely everyone knows about Coke and Pepsi. What is the gain from pouring millions of dol- lars into advertising these wellknown colas? One answer is that advertising is a signal to the con sumer of a highquality product. A signal is an action taken by an informed person (or rm) to send a mes sage to uninformed people. Think about two colas: FIGURE 14.6 Advertising and the Markup With no advertising, 100 demand is low but MC 30 ' markup is large 55 ATC 40' Price and cost [dollars per Nautica iackeii D I ' 1 MRI I I I O 50 75 100 150 200 250 Quantity {Nautica iaeI-cets per day} (a) No rms advertise If no tirms advertise, demand for each tirm's product is low and not very elastic. The profit-maximizing output is small, the markup is large, and the price is high. Price and cost [dollars per Nautica locket: Advertising increases cost but 100 _ makes demand more elastic, MC 30