A monopolist chooses price and advertising to maximize profits. Demand is given by y(p)=200-0.25p+0.05A0.5 where y...

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 π(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.

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Expert Solution

Rahul Sunny answered 1 year ago

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