The makers of Tylenol pain reliever do a lot of advertising and have very loyal customers. In contrast, the makers of generic acetaminophen do no advertising, and their customers shop only for the lowest price.
Assume that the marginal costs of Tylenol and generic acetaminophen are the same and constant.
a. Draw a diagram showing Tylenol’s demand, marginal-revenue, and marginal-cost curves. Label Tylenol’s price and markup over marginal cost.
b. Repeat part (a) for a producer of generic acetaminophen. How do the diagrams differ? Which company has the bigger markup? Explain.
c. Which company has the bigger incentive for careful quality control? Why?