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

Question

Quizplus · Accepted Answer

A profit-maximizing firm should choose the level of output where the marginal revenue (MR) of output equals the marginal cost (MC) of output to maximize profits. At this point, the firm is producing the efficient level of output, where the cost of producing one more unit is equal to the revenue gained from producing one more unit. 
For advertising, the firm should choose the level where the addition to total revenue of the last unit of advertising equals the addition to total cost of the last unit of advertising. This is because the marginal benefit of advertising (the increase in revenue) should be equal to the marginal cost of advertising (the cost of the ad) to maximize profits. 
Therefore, the profit-maximizing firm should choose the levels of output and advertising where both conditions are met, which is option D.

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