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Chapter 13: Problem 3

Draw a graph that shows the effect on a firm's profit when it increases spending on advertising but the increased advertising has no effect on the demand for the firm's product.

Short Answer

Expert verified
After an increase in advertising costs with no increase in demand, the profit of the firm decreases. This effect can be graphically represented by a downward shift in the firm's profit line.

Step by step solution

01

Identify and label the axes

To start with, a coordinate plane is created. The x-axis represents the quantity of the firm's output (Q), and the y-axis represents the cost/revenue/profit (in dollars).
02

Draw the initial profit line

Initially, before the advertising costs are increased, the profit line is drawn. This line is calculated by subtracting the total costs from the total revenue (profit = total revenue - total costs). Because the demand isn't affected by advertising, the total revenue line is a straight line.
03

Adjust the profit line for increased advertising costs

Now, the costs for the firm increase due to higher advertising spending. However, since there is no effect on demand, the revenue does not increase. This results in a lower profit for the firm. The new profit line has to be redrawn to reflect this change, and it will be lower than the previous one.
04

Illustrate the effect on profit

The difference between the initial profit and the new profit after advertising is the loss the firm took up by investing in ineffective advertising. This change can be represented as a downward shift from the first profit line to the second one.

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