Text Problem 26 Question Help er e below shows the relation

| Text Problem 2.6 Question Help er e below shows the relationship for a hypothetical firm between its advertising expenditures and the quantity of its output it expects it can sell at a fixed price of $10 per unit. Quantity Sold At P- $10/In Million Units Advertising Expenditures (Millions) $1.00 $1.40 S1.80 S2.20 $260 5.50 5.70 5.80 5.85 Chro 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) is a constant S8 per unit. How much soft Wo advertising should this firm be doing? This firm shouid spend s millon on advertising. (Enter your response rounded to two decimal places.) . ..11.1 Ja :/? \". (\".» ) More Enter your answer in the answer box and then click Check Answer Clear Al remaining

Solution

Revenue=10Q

Cost=A+8Q

Profit=2Q-A

Q A 2Q-A

5 1 9

5.5 1.4 9.6 Maximum Profit

5.7 1.8 9.4

5.8 2.2 9.4

5.85 2.6 8.9

hence Profit wouold be maximum when Q=5.5 mn and Advertising A=$1.4 mn