Question

In questions 7 – 9, a firm can spend $1,150 monthly on advertising in either the newspaper or on the radio. Marketing experts estimate that monthly sales can be increased by the following amounts:

	Additional Units Sold Monthly
Number of Ads Monthly	Newspaper	Radio
1	1,000	1,800
2	750	1,500
3	500	1,200
4	400	1,000
5	250	600

The prices of newspaper and radio ads are $250 and $300 respectively.

7.   In order to maximize monthly sales, the advertising budget should be allocated so that

1. 1 newspaper ad and 1 radio ad are purchased monthly.
2. 1 newspaper ad and 2 radio ads are purchased monthly.
3. 2 newspaper ads and 2 radio ads are purchased monthly.
4. 3 newspaper ads and 1 radio ad are purchased monthly.
5. none of the above.

8.   If the advertising budget is increased to $2,250 per month, how should the budget be allocated to maximize sales?

1. 2 newspaper ads and 2 radio ads are purchased monthly.
2. 3 newspaper ads and 3 radio ads are purchased monthly.
3. 3 newspaper ads and 4 radio ads are purchased monthly.
4. 3 newspaper ads and 5 radio ads are purchased monthly.
5. none of the above.

9.   In question 8 above, the values of MB(N)/P(N) and MB(R)/P(R) are both equal to

1. 1                                                                      
2. 2                                                                      
3. 3
4. 4
5. none of the above

Answer 1

Given,

Budget=$1150

P(n)=$250

P(r)=$300

Marginal utility table

MB(x) is marginal benefit of per unit money spent. we use the formula given below to calculate it

MB(x)=Marginal utility / Price of utility

To maximise output we use the relation MB(r)=MB(n).

If you look at the table this happens at 4 units.

Hence, till 4 units we buy the product and then shift to another product.

So, 3 units radio and 1 unit Newspaper provides the MAX utility.

Correct answer is e)None of these

B)Now the budget is increased to 2250 per month

we are going to refer to the above table again to figure out another point where

MB(n)=MB(r)

If you look at the table MB(n)=MB(r)=2 units

hence using the same principle as the above question we buy 5 uboits of radio ads and 3 units of newspaper ads to max utility.

correct answer is option D)

C)In the above question MArginal Benifit was taken as 2 units.

Hence,

Answer Is B) 2