Question

A textbook publisher is in monopolistic competition. This company cannot sell books at a price of $ 100 pesos per book. But for every decrease of $ 10 pesos that you make to the price, the number of books you sell increases by 20 books a day. The fixed cost of the company is $ 2,400 pesos a day. The average variable cost and the marginal cost of the company is constant at $ 20 pesos per book. If the company spends $ 1,200 a day on advertising, it can increase the number of books sold at each price by 50%. Compared to the situation where advertising is not used, how is the price that maximizes the company's profits when advertising is used?

a) Increase by $ 5.

b) It does not change.

c) Decreases by $ 10.

d) Increase by $ 10.

Answer 1

Profit is maximized when MR = MC. We are told that MC = 20 per book, hence 400 per 20 books. We calculate MR without advertising first. Pls see table below.

Price	Quantity	Revenue	Marginal Revenue
100	-	-
90	20	1,800	1,800
80	40	3,200	1,400
70	60	4,200	1,000
60	80	4,800	600
50	100	5,000	200
40	120	4,800	-200
30	140	4,200	-600

MR is 400 for 20 books somewhere between 80 and 100 books (let's say at 90 books, which may be at a price of 55).

Now let's do the same with advertising. MC doesn't change but MR should. Pls see table below.

Price	Quantity	Revenue	Marginal Revenue
100	-	-
90	30	2,700	2,700
80	60	4,800	2,100
70	90	6,300	1,500
60	120	7,200	900
50	150	7,500	300
40	180	7,200	-300
30	210	6,300	-900

We see that MR = 400 at a point between P=50 and 60 in the table above, which is similar to the situation earlier.

Hence the right answer is that the Price doesn't change.