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The Brewing Company sells ground organic coffee in one pound containers through several grocery chains in the United States. The marginal cost of production is constant at $4 per pound, and the advertising elasticity of demand is 0.2. The firm current spends $4 million per year on advertising and sells 4 million pounds of coffee per year.
(a) What is the firm's full marginal cost of advertising?
(b) Suppose the firm switches to a more effective advertising agency, and the advertising elasticity of demand increases to 0.3. What is the firm's new full marginal cost of advertising?
(c) Suppose the firm was maximizing profits from advertising before the change, and the marginal revenue from an additional dollar of advertising remains the same after the change. Is the firm maximizing the profits generated from the advertising expenditures after the change? If not, how can the firm adjust its advertising expenditures to maximize profits?
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