Georgetown Public Media is trying to determine the optimum amount for its advertising budget. Calculating the marginal revenue of adding another listener can be computed as the probability of becoming a member times the revenue expected from each member. This is a crude estimate, but it is the only information we have. Using the following spreadsheet, calculate the optimal level of advertising. What is it?
Advertising MR MC Listeners Profit
$10,000 $21 $5.00 2000 $32,000
$20,000 $21 $10.00 3386 $51,112
$21
$21
$21
At this level, the marginal cost of acquiring a customer is $21, equal to the marginal revenue of acquiring a customer. Note also that as the advertising level increases its effectiveness drops. This is reflected in the marginal cost of acquiring another customer and is typical of many extent decisions. You pick the low hanging fruit first, and then you move to the more costly, Higher hanging fruit.
(A) about $36,000
(B) about $40,000
(C) about $42,000
(D) about $55,000
