Posted: November 30th, 2015

Relationship between advertising and sales

The table shows the relationship for a hypothetical firm between its advertising expendituresand the quantity of its out-put that it expects it can sell at a fixed price of $5 per unit.
Advertising	Quantity Sold at P = $5/IN
Expenditures (millions)	Million Units
$1	8
$1.2	9
$1.4	9.4
$1.6	9.6
$1.8	9.7
Required
a.	In economic terms, why might the relationship between advertising and sales look the way it does?
b.	Assume that the marginal costs of producing this product (not including the advertising costs) are a constant $4. How much advertising should this firm be doing? What economic principle are you using to make this decision?