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  3. 4 15 points you are a marketing advisor and the...

Question: 4 15 points you are a marketing advisor and the...

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4. (15 points) You are a marketing advisor, and the firm youre advising has an advertising budget which is 10% of revenues. After some research, youve found that the advertising elasticity of revenues is .3, and that the incremental effect of advertising, while positive, declines with higher levels of advertising. Assuming that advertising increases the quantity sold for a given price but does not affect the cost of production, how would you advise the firm about changing its advertising budget: should it be increased, decreased, or left the same? Explain the reasoning for your recommendation, using a formula.

5. (15 points) Regulating Monopsony. Explain how a regulator can reduce the deadweight loss associated with monopsony by setting a price cap in the market, and explain how it works. Show what the ideal level of this price cap is, and the resulting inefficiency.

6. (20 pts) You are a monopolist facing inverse demand for your product given by p 120-2Q and you have constant marginal cost given by MC-30 (a) (10 pts) Assume you can charge 2 different prices based on quantity purchased. What are the producers surplus-maximizing levels of these prices?(b) (10 pts) Show graphically how much more producers surplus you make by setting 2 prices instead of 1 in this market.

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