How do increases in product quality z affect demand

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A monopolist faces the inverse demand curve P = 22 ? Q/(100z), where z is an index of quality. The monopolist incurs a cost per unit of c = 2 + z^(2) .

(a) How do increases in product quality z affect demand?

(b) Imagine the firm must choose one of three quality levels z = 1, z = 2 and z = 3. Which quality choice will maximize the firm’s profit? What profit-maximizing output and price are associated with this profit-maximizing quality level?

Reference no: EM13771135

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