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nakungth nakungth
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5 years ago
Wiz-Bang Games is a new video game maker for the latest game console.  As a new game maker, they have not established a reputation of providing quality games.  The marginal cost to Wiz-Bang for manufacturing games is: MC(Q) = 0.05Q.  The market price for low-quality games is $20.  The market price for high-quality games is $65.  If Wiz-Bang sells their product in the low quality market, calculate their producer surplus.  If Wiz-Bang sells their product in the high quality market, calculate their producer surplus.  If  Wiz-Bang spends $12,500 on marketing and packaging, they will be perceived as a high quality producer of video games.  Should Wiz-Bang spend the $12,500 to provide a signal to video game consumers of producing high quality games?
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Microeconomics

Microeconomics


Edition: 8th
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oracledarrenoracledarren
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5 years ago
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Since Wiz-Bang is a price taker, they will maximize profits in the low quality market by setting:  P = MC(Q)  $20 = 0.05Q  Q = 400.  Producer surplus if Wiz-Bang operates in the low-quality market is: PS =  ($20)400 = $4,000.  If Wiz-Bang is perceived as a high-quality producer of video games, their profit maximizing condition requires: P = MC(Q)  $65 = 0.05Q  Q = 1,300.  Producer surplus in the high quality market is: PS =  ($65)1,300 = $42,250.  Spending $12,500 on marketing and packaging and operating in the high quality market provides a larger return than operating in the low-quality market.  Thus, Wiz-Bang should spend $12,500 on marketing and packaging.
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nakungth Author
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5 years ago
Thanks for your help!!
fgarza2146
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Correct Slight Smile TY
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This site is awesome
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