13.1 The Blue Line Lounge and Grill is one of the most popular martini bars in the...
Question:
13.1 The Blue Line Lounge and Grill is one of the most popular martini bars in the Chicago area.
While it serves food and other beverages, it is best known for its selection of 30 different martinis.
Suppose that a firm similar to the Blue Line Lounge and Grill is trying to decide how much advertising and promotion it should do and the corresponding price it should charge to maximize profit from the sale of martinis. For simplicity’s sake, assume that demand for the firm’s martinis is affected only by price and advertising. The firm needs to decide how many thousands of dollars to spend on advertising and promotion. Advertising and promotion for this firm include ads on local radio, social media advertising, and food and drink specials during slower times.
A template for the firm’s demand and cost for martinis is completed in the illustrated spreadsheet. In it, the quantity of advertising is measured in thousands of dollars, so that advertising equal to 7 means $7,000 spent on advertising. Use this template, Solver, and the instructions to complete the table.
a. Start at an advertising level of 0, indicating no money spent on advertising. Using Solver, find the profit-maximizing price, and enter the information in the corresponding yellow cells in the table. Round all prices to the nearest penny.
b. Increase the advertising level to 1, indicating $1,000 spent on advertising. Using Solver, find the profit-maximizing price, and enter the information in the corresponding yellow cells in the table.
c. Repeat this process until you complete the table.
d. How many thousands of dollars should the firm spend on advertising? How many martinis does the firm expect to sell, and what is the expected profit from this sale?
e. Why would the firm limit its advertising to the amount you recommended in part d?
Step by Step Answer:
