A Single-product model with advertising:
In this model, the firm maximises sales revenue subject to a minimum profit constraint, which is exogenously determined. An important addition into this model is that of advertising expenditure and a crucial assumption is that sales revenue rises with advertising expenditure (that is, ∂R/∂a > 0 where R = sales revenue, a = advertising expenditure). Baumol also assumes that price remains constant and production costs are independent of advertising. With a setting as described above, Baumol's single - product model with advertising is shown in Figure below.
The advertising outlay is measured along the horizontal axis while costs (c), revenue (R) and profit (π) along the vertical axis. The advertising function is shown as a 450 line. Production costs are shown as cc′ , independent of the level of advertising. The TC (total cost) curve is obtained by adding the advertising cot with the production cost.