is the correct? The table below shows the relationship for a hypothetical firm b
ID: 1160256 • Letter: I
Question
is the correct?
The table below shows the relationship for a hypothetical firm between its advertising expenditures and the quantity of its outps that it expects it can sell at a fixed price of $7 per unit Advertising Expenditures (Millions) Quantity Sold At P $7/1n Million Units $2.00 S2.40 $2.80 S3.20 $3.60 5.00 6.00 6.40 6.60 6.70 In economic terms, why might the relationship between advertising and sales look the way it does? The marginal effect of advertising is decreasing due to diminishing marginal returns Assume that the marginal cost of producing this product (not including the advertising costs) s a cons advertising should this firm be doing? This firm shouid spend s 2 80 milion on advertising. (Enter your response rounded to toro decimalpleces What economic principle are you using to make this decision? rounded to two decimal places.) Set advertising such that A. marginal benefit from advertising equals the marginal cost of advertising. B. the total cost of advertising equals advertising's marg O C. advertising costs are minimized. O D. marginal benefit from advertising is greater than the marginal cost of advertising 0 E. sales due to advertising are maximized.Explanation / Answer
1) The marginal effect of advertising is decreasing due to diminishing marginal returns to input . We here consider advertsing be an input in the production process .
Profit = Total revenue - Total cost . Here profit is maximized only when advertising cost = 2.80$ million .
Marginal benefit from advertising = 6.40 - 6.00 = 0.40 units * 7$
Marginal cost = 2.80 - 2.40 = 0.40 $ millions
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