Question

2) Your car wash company is advertising on local radio, on local television, and via direct mail. You believe that a radio campaign raises your gross profit by $100, a television campaign raises it by $200, and a direct mail campaign raises it by $50. The cost of a radio campaign is $50, the cost of a television campaign is $75, and the cost of a direct mail campaign is $50.

a. If you cannot change your total advertising budget, should you reallocate your spending? If yes, explain how. If no, explain why not.

b. If you can change your advertising budget, should you change your spending on advertising? If yes, explain the changes you would make. If no, explain why not.

3) You are a manager of a trade association. Your members have fixed your advertising budget and will not allow you to change it. You allocate your advertising in two ways: television and magazines. The price of a local television advertisement (PTV) is $200, and the price of a magazine advertisement (PMAG) is $4,000. The marginal benefit from a television advertisement (MBTV) is $3,000, and the marginal benefit from a magazine advertisement (MBMAG) is $80,000. Are you optimally allocating your advertising budget? Explain your answer.

Answer 1

2)a. Car wash company should reallocate it's advertising expenses to spend it's total advertising expenses on the TV advertising because by spending $75 on a television advertisement company can raise Gross Profit by $ 200. It means a Net profit of $125. Whereas in other modes of advertising profit earned is very low or nil.

b) If company would be change it's advertising budget then in order to make its profit go even higher, it can allocate all it's advertising budget to TV advertising.

3) Advertising on television costs $200 and gives benefits of $3,000, that is 15 times the cost. Whereas, by advertising in magazine one can get a benefit of 20 times the cost, i.e. $80,000/$4,000. Therefore, it is more beneficial to allocate advertisement expenditure to magazine advertisement.