A Textbook Publisher Is in Monopolistic Competition

question 118

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. Compared to the situation if it does not advertise, if the firm advertises, the profit-maximizing price

• A) rises by $10.
• B) falls by $10.
• C) rises by $5.
• D) does not change.

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Definitions:

Market Price

The current value at which an asset or service can be bought or sold.

Earnings Per Share

A company's profit divided by the outstanding shares of its common stock, indicating the company's profitability.

Dividends Per Share

A financial ratio that shows how much a company pays out in dividends each year relative to its stock price.

Independent Auditor's Report

A formal opinion or disclaimer, issued by an independent external auditor as a result of an audit or evaluation of an entity's financial statements.