If profits depend on both how much is produced (output)and on the level of advertising,then a profit-maximizing firm should choose the levels of output and advertising at which
A)the marginal revenue of output equals the marginal cost of output.
B)the addition to total revenue of the last unit of advertising equals the addition to total cost of the last unit of advertising.
C)total revenue equals total cost for both output and advertising.
D)both a and b
E)both b and c

Question

Quizplus · Accepted Answer

For a profit-maximizing firm, it is necessary to consider both the levels of output and advertising. Therefore, the firm should choose the levels of output and advertising where both conditions are satisfied:

A) The marginal revenue of output equals the marginal cost of output. This condition ensures that the firm is producing the output level where the additional revenue from producing one more unit equals the additional cost of producing that unit. At this level of output, profit is maximized.

B) The addition to total revenue of the last unit of advertising equals the addition to total cost of the last unit of advertising. This condition ensures that the firm is advertising the optimal level where the additional revenue from advertising one more unit equals the additional cost of advertising that unit. At this level of advertising, profit is maximized.

Therefore, the profit-maximizing firm should choose the levels of output and advertising where both A and B conditions are satisfied. This is represented by choice D.

If Profits Depend on Both How Much Is Produced (Output)and