Managerial Economics
Topics: Marginal cost, Advertising, Variable cost, Newspaper, Cost, Economics / Pages: 7 (1531 words) / Published: Nov 28th, 2012

P7.6 Optimal Input Mix. The First National Bank received 3,000 inquiries following the latest advertisement describing its 30-month IRA accounts in the Boston World, a local newspaper. The most recent ad in a similar advertising campaign in Massachusetts Business, a regional business magazine, generated 1,000 inquiries. Each newspaper ad costs $500, whereas each magazine ad costs $125.

A. Assuming that additional ads would generate similar response rates, is the bank running an optimal mix of newspaper and magazine ads? Why or why not?

o No, the bank is not running an optimal mix of newspaper and magazine ads because the optimal combination would occur when MPn / Pn = MPm / Pm  newspaper output: 3,000 / 500 = 6 and magazine output: 1,000 / 125 = 8.

Therefore, amount spent on newspaper ads attracted 6 inquiries while amount spent on magazine ad attracted 8 inquiries. So to run an optimal mix of newspaper and magazine ads, the bank has to run more magazine ads and/ or fewer newspaper ads.

B. Holding all else equal, how many inquiries must a newspaper ad attract for the current advertising mix to be optimal?

o For the current advertising mix to be optimal, MPn / Pn = MPm / Pm therefore, to increase the newspaper output from 6 to 8,

Find: MPn / 500 = 8 *500  MPn = 4,000
*500

So inquiries generated by newspaper ads would have to increase from 3,000 to 4,000.

P7.7 Marginal Revenue Product of Labor. To better serve customers interested in buying cars over the Internet, Smart Motors, Inc., hired Nora Jones to respond to customer inquiries, offer price quotes, and write orders for leads generated by the company’s Web site. During last year, Jones averaged 1.5 vehicle sales per week. On average, these vehicles sold for a retail price of $25,000 and brought the dealership a profit contribution of $1,000 each.

A. Estimate Jones’ annual (50 workweek) marginal revenue product.

o Jones’ marginal revenue product can be found by the number of cars sold and the

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