A Textbook Publisher Is in Monopolistic Competition

question 150

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. If the firm advertises, its maximum economic profit is

• A) zero.
• B) $800.
• C) $1,200.
• D) -$400.

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Definitions:

Purchased Lots

Refers to the buying of assets or commodities in bulk quantities, often for manufacturing or resale purposes.

Relevant Cost

Costs that differ between alternatives in a decision-making process, and therefore, should be considered when evaluating those alternatives.

Avoidable Costs

Expenses that can be eliminated if a particular decision is made, such as discontinuing a product or service.

Sunk Costs

Costs that have already been incurred and cannot be recovered or changed.