Using a graph, explain why a firm might not want to spend A on advertising, even though it shifts the firm's demand curve to the right. In the figure to the right, let D¹ and MR¹ be demand and marginal revenue before advertising. Assume the monopoly has a constant marginal cost with no fixed cost such that MR¹ = AC¹. Then, suppose the monopoly advertises and that the advertising shifts demand and marginal revenue to D² and MR². Assume advertising is a marginal cost, such that the new marginal cost after advertising is still a constant and still equals a new average cost. Using the line drawing tool, graph the marginal cost curve, reflecting the cost of the advertising, such that the monopoly breaks even from advertising. Label this curve 'MC² Carefully follow the instructions above, and only draw the required objects. 30 28- 26- 24- 22- 20- 18- 16- 14- 100 12- 10- 8- 6- 4 2- MC=AC D² MR MR² D¹ www 4 6 8 10 12 14 16 18 20 22 24 26 28 30 Q, Quantity Q

Using a graph, explain why a firm might not want to spend A on advertising, even though it shifts the firm's demand curve to the right. In the figure to the right, let D¹ and MR¹ be demand and marginal revenue before advertising. Assume the monopoly has a constant marginal cost with no fixed cost such that MR¹ = AC¹. Then, suppose the monopoly advertises and that the advertising shifts demand and marginal revenue to D² and MR². Assume advertising is a marginal cost, such that the new marginal cost after advertising is still a constant and still equals a new average cost. Using the line drawing tool, graph the marginal cost curve, reflecting the cost of the advertising, such that the monopoly breaks even from advertising. Label this curve 'MC² Carefully follow the instructions above, and only draw the required objects. 30 28- 26- 24- 22- 20- 18- 16- 14- 100 12- 10- 8- 6- 4 2- MC=AC D² MR MR² D¹ www 4 6 8 10 12 14 16 18 20 22 24 26 28 30 Q, Quantity Q

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter9: Monopoly

Section: Chapter Questions

Problem 29CTQ: Imagine that you ale managing a small firm and thinking about entering the market of a monopolist....

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