The table above shows the current costs for a firm to advertising on the radio, television, and newspaper.
-Refer to the table above. If at the current advertising level, A = $10,000, B = $14,500, and C = $8,200, to maximize profit, which of the following should the firm do?

Question

Quizplus · Accepted Answer

To maximize profit, the firm should compare the marginal cost and marginal revenue of each advertising option. The marginal cost is the additional cost for advertising and the marginal revenue is the additional revenue that advertising generates.

For radio advertising, the marginal cost is $6,500 and the marginal revenue is $8,000, giving a net gain of $1,500. 
For television advertising, the marginal cost is $11,000 and the marginal revenue is $14,000, giving a net gain of $3,000. 
For newspaper advertising, the marginal cost is $4,000 and the marginal revenue is $5,000, giving a net gain of $1,000.

Based on these figures, the firm should decrease its advertising on television (where the marginal cost is highest) and increase its advertising in newspapers (where the net gain per dollar spent is highest). Therefore, the best choice is B.

The Table Above Shows the Current Costs for a Firm