If a firm in a monopolistically competitive industry is profit-maximizing, it should choose its level of...

If a firm in a monopolistically competitive industry is profit-maximizing, it should choose its level of advertising such that the marginal revenue of an additional dollar of advertising:

a) Is equal to the elasticity of its demand curve minus 1

b) Is exactly $1

c) Increases revenues by $1

d) Is equal to 1 plus the elasticity of its demand curve

e) Is equal to the elasticity of its demand curve

Expert Solution

Option e

Is equal to the elasticity of its demand curve

The advertising should be equal to the elasticity of the demand curve as the demand curve is less elastic after the advertising and it should be used to change the elasticity.

Rahul Sunny answered 2 years ago

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