Question

Advertising is one way existing firms can impose heavy costs to discourage entry into the industry. For example, suppose an existing firm spends 300,000 on advertising costs and sells 50,000 units of output. Now assume a new entrant comes into the industry. The new entrant decides to match the existing firms advertising expenses but only sells 20,000 units of output. What is the difference in the advertising costs per unit of output between the existing firm and the new entrant?

1) 10
2) 15
3) 20
4) 25

Answer 1

The difference in advertising costs per unit of output between the existing firm and the new entrant is $9.

Step-by-step explanation:

The difference in advertising costs per unit of output between the existing firm and the new entrant can be calculated by dividing the total advertising costs by the number of units of output sold. In this case, the existing firm spent $300,000 on advertising costs and sold 50,000 units of output, resulting in an advertising cost per unit of $6. The new entrant matched the advertising expenses at $300,000 but only sold 20,000 units of output, resulting in an advertising cost per unit of $15. The difference between these two costs is $15 - $6 = $9.