All Star Media, Inc. sells ten minute advertising spots on local access television. Each 10 minute increment of advertising costs the customer $300....
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Question

All Star Media, Inc. sells ten minute advertising spots on local access television. Each 10

minute increment of advertising costs the customer $300. The following relation between

advertising spots and clients' monthly customer contacts is estimated to be:


Sales (units) = 5,200 + 50A  0.5A2


Here A represents a 10-minute advertisement, and sales are measured in client customer

contacts. Thomas Wahl, manager for one of All Star's Clients, must choose an appropriate level of advertising. Mr. Wahl recognizes the resemblance to the optimal resource employment

problem he studied in a managerial economics course that was part of his MBA program.

The advertising-sales relation could be thought of as a production function with advertising as an input and sales as the output. The problem is to determine the profit maximizing level of employment for the input, advertising, in this "production" system. Wahl recognized that to solve the problem he needed a measure of output value. After examining prior data, Mr. Wahl determined that the value of output is $10 per contact, the expected net marginal revenue earned (price minus all marginal costs except advertising).


A. Continuing with Wahl's production analogy, what is the "marginal product" of

advertising?


B. What is the rule for determining the optimal amount of a resource to employ in a

production system? Explain the logic underlying this rule.


C. Using the rule for optimal resource employment, determine the profit maximizing number of 10-minute ads. 

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