Question

A firm has graphed its profits versus the advertising expenditure. The graph has one peak at an advertising level of $10,000 (profits equal to $25,000) and another peak at an advertising level of $25,000 (when profits equal $20,000). Which of the following is true

(select all that apply)
a. An advertising level of $10,000 is the global maximum
b. An advertising level of $25,000 is the global maximum
c. An advertising level of $25,000 is the local maxima
d. An advertising level of $10,000 is the local maxima

Answer 1

In the context of profits versus advertising expenditure, the highest profit peak represents the global maximum, which is $25,000 profits at $10,000 advertising. The other peak is a local maximum, which has lower profits of $20,000 at $25,000 advertising. Options A and C are the correct answer.

Step-by-step explanation:

In evaluating the profit maximization of a firm with regards to advertising expenditure, we note two critical points on the graph representing different levels of advertising costs and the corresponding profits: one peak at an advertising level of $10,000 with profits of $25,000, and another peak at an advertising level of $25,000 with profits of $20,000.

The peak that represents the highest profit is known as the global maximum, which in this case is the first peak ($10,000 of advertising resulting in $25,000 of profit). Hence, option (a) 'An advertising level of $10,000 is the global maximum' is correct. The other peak represents a local maximum, as it does not achieve the highest possible profit but is a peak among nearby points. Therefore, option (c) 'An advertising level of $25,000 is the local maximum' is correct. Options (b) and (d) are incorrect because they incorrectly classify the global and local maxima.

The correct options are:

• An advertising level of $10,000 is the global maximum (option a)
• An advertising level of $25,000 is the local maximum (option c)