Question 1

Marge's Beauty Salon sells shampoo and conditioner. Marge has two types of customers. Their willingness-to-pay for shampoo and conditioner are given in the table below. If Marge bundles the shampoo and conditioner, could she increase revenue?

Accepted Answer

The answer of Marge's Beauty Salon sells shampoo and conditioner....

Question 2

Use the following statements to answer this question. I. To maximize profit, a firm will advertise more when the advertising elasticity is larger.
II) To maximize profit, a firm will advertise more when the price elasticity of demand is smaller.

Accepted Answer

When advertising elasticity is larger, advertising has a greater effect on demand, encouraging more advertising. When price elasticity of demand is smaller, demand is less sensitive to price changes, allowing firms to increase prices and profit from increased demand due to advertising.

Question 3

Grocery store chains advertise more than convenience stores because:

Accepted Answer

The advertising elasticity of demand for convenience stores is near zero and is much smaller than for grocery store chains. This means that advertising does not have a significant impact on the demand for convenience stores, while it does have a significant impact on the demand for grocery store chains. Therefore, it makes more sense for grocery store chains to invest more in advertising compared to convenience stores.

Question 4

Suppose we advertise up to the point where the last dollar spent on advertising generates an additional dollar of sales revenue (i.e, the marginal revenue of advertising equals one). If the full marginal cost of advertising is greater than one, then we will generate:

Accepted Answer

If the marginal cost of advertising is greater than the marginal revenue (which is one), then the firm is spending too much on advertising, leading to more output than the profit-maximizing level.

Question 5

Your family operates Voltaire's Pizza, which ships frozen hand-made pizzas by over-night delivery to homes within 500 miles of your city. You are asked to determine the optimal monthly advertising expenditures for the business. The total monthly cost of pizza production is  where A is the advertising expenditure. The firm's marginal revenue from advertising is constant at  , and the advertising elasticity of demand is 0.3.
a. What is the firm's marginal cost of production (MC)? What is the firm's full marginal cost of advertising (as a function of Q and 
A)?
b. Suppose you know the profit maximizing level of output is Q = 9,000 pizzas per month. What is the firm's optimal level of advertising expenditure?

Accepted Answer

The answer of Your family operates Voltaire's Pizza, which ships...

Question 6

We may be tempted to determine the optimal level of advertising expenditures at the point where the last dollar spent on advertising generates an additional dollar of sales revenue (i.e, the marginal revenue of advertising equals one). In general, this rule will not allow the firm to maximize profits because it ignores the:

Accepted Answer

The correct answer is B because the rule described ignores the marginal cost of additional sales generated by advertising. To maximize profits, a firm must consider both the additional revenue generated by advertising (marginal revenue) and the additional costs incurred to generate those sales (marginal cost). The optimal level of advertising expenditure is where the marginal cost of advertising equals the marginal revenue from the additional sales it generates, not simply where the marginal revenue of advertising equals one.

Question 7

Larry's Carpet Cleaners can influence demand by advertising. Larry charges $50 per carpet, and he cleans 150 carpets per month. The price elasticity of demand is -4, and Larry spends $500 per month on advertising. If Larry is maximizing profits, calculate the advertising elasticity of demand.

Accepted Answer

The answer of Larry's Carpet Cleaners can influence demand by...

Question 8

The Sneed Snack Shop sells hamburgers and french fries. Given that there are 4 different types of customers whose willingness-to-pay are presented in the table below, give a pricing scheme that allows customers to buy combination meals and increases revenues for the Shop. The marginal cost of producing a hamburger is $0.60 and the marginal cost of an order of fries is $0.40.

Accepted Answer

The answer of The Sneed Snack Shop sells hamburgers and...

Question 9

The Happy Mountain Brewing Company sells ground organic coffee in one pound containers through several grocery chains in the US. The marginal cost of production is constant at $4 per pound, and the advertising elasticity of demand is 0.2. The firm current spends $4 million per year on advertising and sells 4 million pounds of coffee per year.
a. What is the firm's full marginal cost of advertising?
b. Suppose the firm switches to a more effective advertising agency, and the advertising elasticity of demand increases to 0.3. What is the firm's new full marginal cost of advertising?
c. Suppose the firm was maximizing profits from advertising before the change, and the marginal revenue from an additional dollar of advertising remains the same after the change. Is the firm maximizing the profits generated from the advertising expenditures after the change? If not, how can the firm adjust its advertising expenditures to maximize profits?

Accepted Answer

The answer of The Happy Mountain Brewing Company sells ground...

Question 10

You interview with an athletic footwear manufacturer that has annual advertising expenditures of $32 million and total sales revenue of $100 million, and the firm selects the profit maximizing level of advertising expenditures. If the advertising elasticity of demand is 0.4, then you know that "Rule of Thumb for Advertising" implies that the demand for the firm's products is:

Accepted Answer

According to the "Rule of Thumb for Advertising," if the advertising elasticity of demand is between 0 and 1, the demand is elastic. In this case, the advertising elasticity of demand is 0.4, which is between 0 and 1, so the demand is elastic.

Question 11

Cornucopia Media provides cable television service to several cities in the mid-Atlantic region. The firm has access to two new channels that focus on reality television programming, and the marginal cost of providing both new channels is zero. The first channel is Extreme Scottish Sports (ESS) and appeals to younger viewers, and the second channel is Delaware Entertainment and Tourism (DET) and appeals to older viewers. Based on Cornucopia's market research, younger viewers are willing to pay $5 per month for ESS, and their reservation price for DET is $0.50 per month. The same research indicates that older viewers have a reservation price of $1.00 per month for ESS and $4.00 per month for DET.
a. Please show how Cornucopia media can increase sales revenue by bundling the two channels rather than selling access to the channels separately.
b. The US Congress has recently considered legislation that would allow cable television subscribers to purchase access to separate channels (without bundling). If the law is enacted, what should we expect to happen to sales revenue in cable television markets?

Accepted Answer

The answer of Cornucopia Media provides cable television service to...

Question 12

One Guy's Pizza advertising expenditures are $1,200 and sales are $30,000. When the advertising expenditure increases to $1,400, pizza sales increase to $32,000. The arc advertising elasticity of demand is approximately:

Accepted Answer

Arc elasticity of demand is given by the formula:

Arc elasticity = (Q2 - Q1) / Qavg * (Pavg / (P2 - P1))

Where,

Q1 = Initial quantity demanded = 30,000
Q2 = Final quantity demanded = 32,000
P1 = Initial price = $1,200
P2 = Final price = $1,400
Qavg = (Q1 + Q2) / 2 = (30,000 + 32,000) / 2 = 31,000
Pavg = (P1 + P2) / 2 = ($1,200 + $1,400) / 2 = $1,300

Substituting the values in the formula, we get:

Arc elasticity = (32,000 - 30,000) / 31,000 * ($1,300 / ($1,400 - $1,200))
= 2,000 / 31,000 * ($1,300 / $200)
= 0.419

Rounding off to one decimal place, the arc elasticity of demand is approximately 0.4, which is option C.

Question 13

A 10 percent decrease in advertising results in a 5 percent sales decrease. The advertising elasticity of demand is:

Accepted Answer

The answer of A 10 percent decrease in advertising results...

Question 14

The price elasticity of demand for nursery products is -10. The advertising elasticity of demand is 0.4. Using the "Rule of Thumb for Advertising," the profit maximizing level of advertising will be set at ________ of sales.

Accepted Answer

The "Rule of Thumb for Advertising" suggests that the optimal advertising-to-sales ratio is equal to the advertising elasticity of demand divided by the absolute value of the price elasticity of demand. Here, it would be 0.4 / 10 = 0.04, or 4 percent.

Question 15

Jeremy's Jet Ski Rentals can influence demand by advertising. Currently, Jeremy rents 30 jet skis per period. His advertising budget is $250 per period. The advertising elasticity of demand is 1.25. The price elasticity of demand is -2. If we know that Jeremy is maximizing profits, calculate the price he must be charging per jet ski rental.

Accepted Answer

The answer of Jeremy's Jet Ski Rentals can influence demand...

Question 16

Your company sells health food products, and you have recently developed a new high-protein drink (HPD) as well as a high-carbohydrate energy bar (HCE). As the product manager for the firm, you are responsible for setting the pricing policy for the new products. You are considering a bundled package that includes both products, and you assume the marginal cost of production is zero for planning purposes. You have identified four basic types of consumers who may buy these new products, and their reservation prices for the two new products are provided in the following table:
  a. Suppose you sell the two products separately, and each buyer is expected to purchase one unit of the product per day. Which prices for HPD and HCE maximize daily revenue? What is your daily revenue from selling both products to the four customers under separate pricing?
b. If you offer the two products under a pure bundling strategy, what is the revenue maximizing bundle price? What is the daily sales revenue from the pure bundling scheme?
c. Please develop a mixed bundling strategy that generates higher daily sales revenue than the pure bundling strategy. What is the daily sales revenue generated under mixed bundling?

Accepted Answer

The answer of Your company sells health food products, and...

Question 17

Use the following statements to answer this question. I. To maximize profit, a firm will increase its advertising expenditures until the last dollar of advertising generates an additional dollar of revenue.
II) The full marginal cost of advertising is the sum of the dollar spent directly on advertising and the marginal production cost that results from the increased sales that advertising brings about.

Accepted Answer

Statement I is false because a firm will increase advertising expenditures until the marginal revenue from advertising equals the marginal cost, not just the last dollar generating an additional dollar of revenue. Statement II is true as it correctly describes the full marginal cost of advertising.

Question 18

Which of the following statements is true?

Accepted Answer

If the elasticity of demand declines, it means that consumers are becoming less sensitive to changes in price and more sensitive to other factors such as brand name recognition or quality. This implies that advertising becomes less effective at increasing sales, and therefore the optimal advertising-to-sales ratio would decline. The other statements are false. A is not necessarily true because the marginal cost of advertising is not the only factor to consider when determining the optimal advertising expenditure. B is false because a leftward shift in the demand curve indicates a decrease in demand, not an increase in elasticity. D is false because an upward-sloping demand curve does not necessarily imply a positive advertising elasticity of demand.

Question 19

Hawkins MicroBrewery can influence demand by advertising. Hawkins spends $5,000 per period on advertising. The advertising elasticity of demand is 2. The price elasticity of demand is -1.5. Hawkins sells each unit for $15. Given that Hawkins is maximizing profit, calculate the number of units sold.

Accepted Answer

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Question 20

The authors note that advertising can make the consumer demand for a product more elastic (price responsive) by expanding the potential range of consumers. As this change in demand occurs (ceteris paribus), what happens to the optimal advertising-sales ratio?

Accepted Answer

The answer of The authors note that advertising can make...

Quiz 11: Pricing With Market Power