Q

MC $50 200 20,000

Notice that sales have doubled from 10,000 to 20,000 at the $150 price. The effect on profits is dramatic, rising from $750,000 to $1.25 million, even after accounting for the additional $500,000 in media expenditures. Therefore, the new advertising campaign appears fully warranted. In fact, given the $1.25 million in profits that are generated by a doubling in unit sales at a price of $150, Consumer Products would be willing to pay up to that full amount to double sales. From this perspective, the $500,000 price charge for the advertising campaign represents a relative bargain. The profit implications of other forms of advertising, or other types of nonprice competition, can be measured in a similar fashion.

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