CH1EX - Since marginal cost is less than marginal benefit,...

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Example : applying the cost benefit principle What we know: A firm can choose how many hours to advertise. Each hour of advertising costs $300. More hours of advertising result in more customers. Each customer spends an average of $10 at the firm. Hours of Number of Advertising Customers 0 100 1 150 2 190 3 220 4 230 5 230 When we decide how much to advertise we think AT THE MARGIN. Hour 1: we gain an additional 50 customers and each customer spends $10 so that is a total of $500. The cost of the hour of advertising is $300. Since marginal cost is less than marginal benefit, we take the action. Hour 2: we gain an additional 40 customers and each customer spends $10 so that is a total of $400. The cost of the hour of advertising is $300.
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Unformatted text preview: Since marginal cost is less than marginal benefit, we take the action. Hour 3: we gain an additional 30 customers and each customer spends $10 so that is a total of $300. The cost of the hour of advertising is $300. Since marginal cost is equal to marginal benefit, we are willing to take the action. We do not lose anything and more customers are generally preferred to less. Hour 4: we gain an additional 10 customers and each customer spends $10 so that is a total of $100. The cost of the hour of advertising is $300. Since marginal cost is greater than marginal benefit, we do not take the action. Hour 5: we would not advertise the 5 th hour as it gains us no additional customers....
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