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HW 3 - Sol - ECON 425 100 HOMEWORK#3 SOLUTIONS(Due at the...

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E CON 425- 100 H OMEWORK #3 S OLUTIONS (Due at the beginning of class on Wednesday 06/28) 1. Say market demand is given by Q(p) = 200 p. Explain why you can state that, even without knowing the exact marginal cost curve, that the monopolist (without fear of entry) would never set a price of 75. If marginal costs were equal to zero (the best case scenario) then the monopolist would produce 100 units and set a price of 100. An increase in marginal costs would lead to an increase in price, and never to a decrease. So price would never be 75. 2. Suppose you are a producer of an experience good. What kind of advertising would you spend more money on, informative or persuasive advertising? Brie fl y explain your answer. I’d spend more money on persuasive advertising, because customers cannot judge the quality of my product before they have experienced it (i.e. bought and consumed it). Therefore, I’d like to get my customers to buy instead of just informing them about my price and the features of the product. They can then judge for themselves that my product is the best.
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