managerial economics

Display all calculations and briefly explain your answers.
Question6
Two firms sell output in a market. In an initial equilibrium, total market profits are 1000. Each firm is considering whether to advertise. Advertising costs 100. if either firm advertises, market profits increase by 20%. If both firms advertise, profits rise by 30% (i.e.: profits increase to 1300). In any case, the firms split market profits.

a)Summarize all possible outcomes in this advertising game using payoff matrix, and identify the equilibrium outcome.

b)Is advertising predatory or cooperative? Give a brief explanation.

c)Now consider a different market, where a monopolist faces a linear demand curve q= 10 – 40p + 20A, where p is the per unit market price and A is the monopolist’s expenditure on advertising. The monopolist is charging a price p=$0.25 and it spending $0.10 on advertising, solve for the price elasticity of demand and the advertising elasticity of demand.

d)Is the monopolist spending the optimal amount on advertising? Give a brief explanation.

managerial economics

sennachan

Joined September 2008

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