Franco's Frozen Ice produces Italian flavored ice that is sold in the freezer section of grocery stores. Currently, Franco's does not have a fixed advertising budget and advertises in grocery stores' weekly advertising flyers and on the radio. A unit of advertising in the weekly flyers costs $1,500 and a unit of advertising on the radio costs $5,500. At their current advertising levels, the marginal benefit of advertising in the flyer is $1,750 and the marginal benefit of advertising on the radio is $5,000. Which of the following is true?

Question

Quizplus · Accepted Answer

To maximize profits, a firm should continue to invest in an advertising medium as long as the marginal benefit of advertising exceeds the marginal cost. For Franco's, the marginal benefit of advertising in the flyer ($1,750) exceeds its cost ($1,500), suggesting they should increase flyer advertising. Conversely, the marginal benefit of radio advertising ($5,000) is less than its cost ($5,500), indicating they should decrease radio advertising.

Franco's Frozen Ice Produces Italian Flavored Ice That Is Sold