Chapter 10, Problem 1SCQ

Suppose that, due to a successful advertising campaign, a monopolistic competitor experiences an increase in demand for its product. How will that affect the price it charges and the quantity it supplies?

To determine

The way the advertising campaign affect the price charged and quantity supplied by a monopolistic competitor.

Explanation of Solution

Monopolistic Competition: is a kind of imperfect competition where there are a large number of producers, each sell differentiated products and there is a freedom of entry and exit in the long run.

If due to a successful advertising campaign, a monopolistic competitor experiences an increase in demand for its product, the monopolist will surely increase the prices in order to earn more profits and moreover the burden of the cost of advertisement will also fall on the consumer, as the firm will never bear the burden of additional advertisement.

So, if the prices of the products are raised, there is a possibility that the quantity demanded would fall. So, if the quantity demanded would fall, ultimately the producer has to reduce the quantity it supplies.

A rise in the demand will lead to a rightward shift in the demand curve, and thus a rightward shift in the marginal revenue. Thus, the shift in marginal revenue will lead to a movement up the marginal cost curve to form a new intersection between Marginal cost and Marginal revenue at a higher level of output.

The price that is obtained should be higher. An increased quantity will lead to a higher level of average cost. The price will increase more, leading to an increase in total profits.

So, this is the overall impact of a successful advertising campaign.

Economics Concept Introduction

Monopolistic Competition: is a kind of imperfect competition where there are a large number of producers, each sell differentiated products and there is a freedom of entry and exit in the long run.