Should you accept proposal if the goal is to maximize profit

Reference no: EM13214088

You have just received a proposal from the marketing department that your firm's advertising budget should be increased by 20% from its current level of $250,000. The marketing department feels the proposed increase will stimulate sales and enhance profits. You are currently selling 200,000 units at a price of $5 per unit and your total cost function is given below. Given an advertising elasticity of .4 and the total cost function below, answer questions A, B and C: TC = 300,000 + 2q +A where A = Advertising expenditures and q = the number of units produced.

A) How many extra units will be sold as a result of the increase in advertising expenditures?

B) Determine Incremental Cost, Incremental Revenue and Incremental Profit if the increase in the advertising budget is approved.

C) Given your answer to B, Should you accept the proposal if your goal is to maximize short run profits?

Reference no: EM13214088

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