economics

The table shows the relationship for a hypothetical firm between its advertising expenditures and the quantity of its out-put that it expects it can sell at a fixed price of $5 per unit.
Advertising Quantity Sold at P = $5/IN
Expenditures (millions) Million Units

$1 8
$1.2 9
$1.4 9.4
$1.6 9.6
$1.8 9.7

a. In economic terms, why might the relationship between advertising and sales look the way it does?
b. Assume that the marginal costs of producing this product (not including the advertising costs) are a constant $4. How much advertising should this firm be doing? What economic principle are you using to make this decision?

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  1. take a shot, what do you think?

    Hint: calculate the change in revenue from each 0.2 increase in advertising, subtract the marginal cost of producing that extra unit. (e.g., calculate the change in profit from each 0.2 increase in advertising). Keep increasing advertising until this term goes to zero or negative.

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  2. 1.8 million where MR = 2.5 mil?

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