Nonprice Competition

Nonprice Competition. Tickets, Inc., uses mall intercept promotion services to promote concerts and sporting events. The St. Louis firm uses a team of ten students to hand-deliver flyers at shopping malls and other high traffic centers, where every hour increment of flyer advertising costs $130. Over the past year, the following relation between advertising and ticket sales per event has been observed:
and
Here A represents one hour of flyer distribution, and sales are measured in numbers of tickets. Niki Martin, manager for the St. Louis firm, has been asked to recommend an appropriate level of advertising. In thinking about this problem, Martin noted its resemblance to the optimal resource employment problem she had studied in a managerial economics course that was part of her MBA program. The advertising-sales relation could be thought of as a production function with advertising as an input and sales as the output. The problem is to determine the profit-maximizing level of employment for the input, advertising, in this "production" system. Martin recognized that to solve the problem she needed a measure of output value. After consultation with associates, she determined that the value of output is $2 per ticket, the net marginal revenue earned (price minus all marginal costs except flyer advertising).
A. Continuing with Martin's production analogy, what is the "marginal product" of advertising?
B. What is the rule for determining the optimal amount of a resource to employ in a production system? Explain the logic underlying this rule.
C. Using the rule for optimal resource employment, determine the profit-maximizing number of flyer distribution hours.

Correct Answer:

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