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Walter Economics is a "one-man shop" economic consulting firm
Walter Economics is a "one-man shop" economic consulting firm. Walter provides economic consulting services to multinational corporations and charges them an hourly rate for his services. In order to attract business Walter must purchase advertisements in professional trade publications. Walter finds that the marginal benefit of each additional advertisement is: MB(A) = 60,000/A, where A is the number of advertisements that Walter publishes each week.
a. Suppose that the cost of an advertisement is $30,000. How many advertisements should Walter purchase?
b. Suppose that the cost of an advertisement is $20,000. How many advertisements should Walter purchase?
c. Suppose that the cost of an advertisement is $15,000. How many advertisements should Walter purchase?
d. Suppose that the cost of an advertisement is $11,000. How many advertisements should Walter purchase?
Expert Solution
Applying marginal analysis to the example of the Walter Economics consulting firm:
| a. Suppose that the cost of an advertisement is $30,000. How many advertisements should Walter purchase? | 60,000/30,000 = 2 |
| b. Suppose that the cost of an advertisement is $20,000. How many advertisements should Walter purchase? | 60,000/20,000 = 3 |
| c. Suppose that the cost of an advertisement is $15,000. How many advertisements should Walter purchase? | 60,000/15,000 = 4 |
| d. Suppose that the cost of an advertisement is $11,000. How many advertisements should Walter purchase? | 60,000/11,000 = 5 (rounded from 5.45) |
The formula, MB(A) = 60,000/A, is a way of comparing the marginal benefit to the marginal cost. In each case, the cost of the advertising is weighed against its ability to generate clients and therefore increase revenue.
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