Refer to the table below showing the effects of running television commercials on a firm’s total revenue. Assume that each commercial costs $1,000 to run.
| Number of commercials | Total revenue |
| 0 | $20,000 |
| 1 | 30,000 |
| 2 | 38,000 |
| 3 | 44,000 |
| 4 | 48,000 |
| 5 | 50,000 |
| 6 | 50,500 |
What is the marginal revenue from running the second commercial?
Should the firm run a third commercial? Explain.
If the firm has no variable costs aside from the cost of commercials, how many commercials should the firm run to maximize profits? Explain.
1 point: $8,000
1 point: Yes
1 point: Because the marginal revenue of $6,000 exceeds the marginal cost of $1,000
1 point: 5
1 point: Marginal revenue exceeds marginal cost for the first 5 commercials. Marginal revenue is less than marginal cost for the 6th commercial.
Explain two ways in which product differentiation can be useful to consumers and two ways in which it can be detrimental to consumers.(4 points)
Rubric for FRQ 2 (4 points)
1 point:Any one of the following: Product differentiation can provide variety, information through advertising, predictability through branding, and incentives for good quality because firms want to protect their brand image.
1 point:A second item from the list above
1 point:Any one of the following: Product differentiation can involve misleading advertising, brand images that lead customers to pay too much for goods, and an increase in market power (and therefore prices).
1 point:A second item from the list above