A Textbook Publisher Is in Monopolistic Competition

question 109

Multiple Choice

A textbook publisher is in monopolistic competition. If the firm spends nothing on advertising, it can sell no books at $100 a book, but for each $10 cut in price, the quantity of books it can sell increases by 20 books a day. The firm's total fixed cost is $2,400 a day. Its average variable cost and marginal cost is a constant $20 per book. If the firm spends $1,200 a day on advertising, it can increase the quantity of books sold at each price by 50 percent. The firm will

• A) advertise because advertising will increase its economic profit.
• B) not advertise because advertising will lower its economic profit.
• C) advertise because advertising will decrease its economic loss.
• D) not advertise because advertising will increase its economic loss.

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Definitions:

Tax Rate

The rate at which taxes are levied on an individual or a corporation's income.

CVP Graph

A visual tool used in cost-volume-profit analysis to show relationships between costs, revenues, and operating volumes.

Break-Even Point

The point at which total costs and total revenue are equal, resulting in no net loss or gain.

Fixed Cost

Costs that remain constant regardless of the level of production or sales volume, such as rent or salaries.