17.3 Innovation and Advertising

MyEconLab Concept Video

You’ve seen how a firm makes its output and price decisions for a product that is already designed and advertised. We’re now going to study a firm’s product design and quality and advertising decisions.

Design and Quality Decision

Economic profit attracts entry, and entry erodes profit. To enjoy ongoing economic profit, a firm in monopolistic competition must continually innovate.

The decision to allocate resources to product innovation is made using the same profit-maximizing calculation that you’ve already studied. At a low level of innovation activity, the marginal revenue it brings in exceeds the marginal cost. At a high level of innovation activity, its marginal cost exceeds marginal ...

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