DEPARTMENT OF ECONOMICS
Answers to Problem Set #1
ofTV, Radio, AND Internet Advertising DO exhibit diminishing
returns, because each extra (marginal) $1 OOK spent on each
of them adds LESS
and LESS to beer sales.
...more is less better. Now, however,
ifwe allow for the
ofInternet advertising with the numbers given, it is no longer optimal
to spend $800K on TV and $200K on radio. Ifwe look at MARGINAL benefits,
then the first $1 OOK should be spent on Internet advertising, because its marginal
benefit (5000 barrels) is greater than either TV (4750) or Radio (950). The next
$800K, however, should be spent on TV advertising, as the marginal benefit
of the $lOOK's on TV up to $800K exceed 1000 barrels (the marginal
of the second $100K spent on Internet advertising). What about the final
$100K, now that you've spent $100K on the Internet and $800K on TV? With
final $ lOOK, you could either get 750 barrels with TV, 950 with radio, or
1000 with the Internet. Go for the Internet. Thus, in this problem, it is never
profitable to use radio advertising. Spend $800K on TV and $200K on the
Internet fora total of30,000 barrels sold.
Note also that you should spend the $1 OOK amounts in the right order: the first
$lOOK on the Internet, followed by $800K on TV, and THEN the final $1 OOK
back on the Internet. What
if you start by spending $200K on the Internet, with
of spending the REST of your money ($800K) on TV. BUT, the
advertising manager calls to tell you the budget has been cut in half, let's say.
Then, you won't have maximized sales
of the remaining $500K because you
different spend in the right order. .
Using the point elasticity form, we would have: