Question

Case Study on Marginal Analysis: Mr. Sultan is a regional media consultant for Paz Images, LLC., a UAE -based media consultant. Sultan has gathered the following data on weekly advertising media expenditures and gross sales for a major client, ABC Coffeehouse.

Advertising Expenditure	Gross Sales Following Promotion in the Following Media:
	Newspaper	Radio	Television
AED 0	AED 10,000	AED 10,000	AED 10,000
100	12,000	14,000	13,000
200	13,800	17,600	15,600
300	15,400	20,200	18,000
400	16,600	22,000	18,600
500	17,200	22,400	18,800

1. Construct a table (or spreadsheet) showing marginal sales following promotion in each media.

2. If the ABC Coffeehouse has an advertising budget of AED500 per week, how should it be spent? Why?

Answer 1

a) Marginal Benefit is the rise in gross sales when advertisement expenditure rises.

	Newspaper		Radio		Television
Advertisement Expenditures	Gross Sales	Marginal Benefit	Gross Sales	Marginal Benefit	Gross Sales	Marginal Benefit
0	10000	-	10000	-	10000	-
100	12000	2000	14000	4000	13000	3000
200	13800	1800	17600	3600	15600	2600
300	15400	1600	20200	2600	18000	2400
400	16600	1200	22000	1800	18600	600
500	17200	600	22400	400	18800	200

b) If expenditure budget is $500, ABC firm must invest first 100 in radio because marginal benefit is maximum, they invest second 100 in radio because marginal benefit is maximum there. Likewise they will spend $400 in radio and $100 in television to maximize their advertisement coverage.