Question

What is the profit-maximizing amount of advertising?

A. The point where the marginal benefit of advertising is equal to the marginal cost of advertising.
B. The output level that minimizes the marginal cost of advertising.
C. The point where gross profit as a function of advertising is maximized.
D. The point where the additional gross profit from advertising is equal to the marginal cost of production.

Answer 1

The correct answer is A, where the marginal benefit of advertising is equal to the marginal cost of advertising, aligning with the principle that profits are maximized where MR equals MC.

Step-by-step explanation:

The profit-maximizing amount of advertising is A. The point where the marginal benefit of advertising is equal to the marginal cost of advertising. This is an application of the economic principle where profit is maximized at the output level where marginal revenue (MR) equals marginal cost (MC). In this case, it's about the additional revenue brought in by an extra unit of advertising spending compared to the additional cost incurred for that unit.

For a perfectly competitive firm, the profit-maximizing output occurs where MR equals MC. In the context of advertising, the same rule applies. Thus, a firm should continue to spend on advertising up to the point where the cost of an additional unit of advertising is exactly balanced by the additional revenue it generates.