Question

An increase in promotion budgets in CapSim will

a) Have diminishing returns beyond $2 million
b) Generate cummulative returns at any level
c) Experience level returns
d) Have no effect except on the Marketing Budget
e) All of these are correct answers

Answer 1

An increase in promotion budgets in CapSim is likely to have diminishing returns beyond $2 million, meaning that each additional dollar spent will contribute less to output or market performance than the previous dollar did.

Step-by-step explanation:

The question concerns how an increase in promotion budgets in CapSim will affect a company's performance. Based on the law of diminishing marginal returns, this would imply that promotion budgets will have diminishing returns beyond a certain point, such as $2 million. This economic principle suggests that while initial investment in promotion may significantly impact market performance, subsequent increases will yield progressively smaller gains. This concept applies similarly to investments in human and physical capital, like education and equipment, where each additional unit of investment will produce less incremental output or benefit than the last.

Diminishing marginal returns are an important consideration in CapSim and business strategy development because they highlight the importance of optimizing investment levels rather than just increasing the budget. Efficient allocation of a promotion budget requires careful analysis to avoid spending beyond the point where the returns no longer justify the investment.