Question

Calculate the optimal output of a firm that operates two plants and the optimal level of advertising for a firm that enjoys market power. Try these problems: 8, 19

Short answer

Market power is a company's capacity to raise its prices above the degree that would exist in a strongly competitive marketplace.

Step-by-step solution

Step 1:Market power

Market power is defined as a firm's amount of control over identifying the market pricing, either for a particular item or in general within its sector. A corporation with varying degrees of success has the capacity to influence market prices and therefore manage its profitability, as well as the capability to build barriers to possible new entrants into the marketplace.

Explanation

The optimum amount of output for a corporation with market power (that is., a monopoly scenario), as well as two plants, will be where Marginal Revenue (MR) = Marginal Cost (MC) of Plant 1 = Marginal Cost of Plant 2 (MC2)

For a business with market power (a monopoly scenario), the optimal amount of advertising will be at the point where the company maximizes its profits, and earnings will be greatest at the production level where MR equals the MC.