Question

Suppose because of an advertising campaign, which costs $150, the monopoly’s demand curve is: P=32-Q so its MR= 32-2Q

1. 1. Looking closely at the TC function and the demand curve, explain the effects of the advertising campaign on the equations
2. 2. Find the firm’s Profit maximizing Q
3. 3. Find the firm’s Profit maximizing P.
4. 4. Find the firm’s Profit.
5. 5. Was the advertising campaign successful?
6. 6. Do you have any suggestions that might turn the situation around?

Answer 1

Find the firm’s Profit maximizing Q
A firm maximises it profit where MR = 0. It's the point of producer's equilibrium. We already know that our MR function is MR = 32 - 2Q. Only if we put 16 in place of Q, we get a zero MR. Hence our profit maximising quantity is 16 only. in short: Q = 16.

​​​​​​​Find the firm’s Profit maximizing P.
Let us put the above value of Q in demand function as below:
P=32-Q
P=32-16
P=16

​​​​​​​Find the firm’s Profit.
Profit = TR - TC
TC = 150 (advertisment cost, if we think of only 'incremental cost' here. The question doesn't talk about any cost except advertisement cost, hence we are considering that only)
TR = Q x P = 16 x 16 = 256
Profit = 256 - 150 = 106
Profit = 106

​​​​​​​Was the advertising campaign successful?
Yes, because the incremental revenue (256) exceeds the incremental cost (150).

​​​​​​​Do you have any suggestions that might turn the situation around?
Firm can review its decision about incurring advertisement costs.

Looking closely at the TC function and the demand curve, explain the effects of the advertising campaign on the equations
Because of advertising costs incurred, the TC curve will move upwards. It is so because after advertisement cost are incurred, TFC curve will move upwards and it will resultantly cause the TC curve also moving upwards (TC = TFC + TVC). And due to the same reason, the demand curve will tend to transform into more elastic than earlier. It's so because advertisement compells the reluctant but potentail buyers to buy now.