Should the firm spend $80 on advertising in the following case. Also, what is the optimum price of the product.
The Monopoly has 2 types of customers, Type A & Type B customers. There are 100 of Type A customers who will each pay up to $10/unit and 50 of Type B customers who will each pay up to $8/unit. I am trying to determine if it is worth advertising and what happens to the price if they spend $80 on advertising to get 100 more Type B customers.
There are two categories of customers, Type A and Type B. The number of customers that fall under type A is 100 and they are willing to pay $10 per unit of the product. There are 50 Type B customers and they are willing to pay only $8 per unit of the product. There is no change in the quantity bought by the customers if the price is changed.
If the firm decides to keep the price of the product between $10 and $8 it can only sell 100 units to the type A customers. The revenue earned is $1000.
On decreasing the price to $8, the number of customers increases to 150 and the revenue is increased to $1200. If the firm spends $80 on advertising and is able to increase the number of type B customers by 100 to 150, the revenue increases by $800. This makes the total revenue is equal to $2000.
If it is possible to increase the number of customers by 100 with just $80 spent on advertising the firm should do so. Also, the optimum price does not change in any case. It remains at $8 per unit.