Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

here is the question A firm's managers aim to maximize total revenue rather than profits. At the same time, shareholders stipulate that an acceptable profit

here is the question

image text in transcribed
A firm's managers aim to maximize total revenue rather than profits. At the same time, shareholders stipulate that an acceptable profit of m should be achieved. (Suppose the managers set to achieve this level m exactly; m is a parametric constant.) The firm's total revenue, R, is a function of its output q and its advertising level a such that: R(q , a) = q' + 2a Suppose the price of each unit of advertising is 1. Therefore, advertising costs are equal to a. Other than advertising costs, the firm incurs production costs; the unit variable production cost is given by v, and the fixed cost is f. i ) Use a Lagrangian function to find the manager's optimal output and optimal advertising expenditure. [Hint: You should be able to figure out your endogenous variables from the sentence I just gave you for this part.] ii) Check to see if your second-order condition is satisfied. iii) Without performing another optimization problem, find the impact on the firm's revenue if the constraint is relaxed by one unit. (Be sure to clearly explain what you understand by "relaxing the constraint by one unit.") Provide an explanation of your answer in plain English. iv) What is the impact of a rise in shareholders' acceptable profit on optimal advertising expenditure in this firm? (I need an answer derived mathematically and explained in words - using plain English.) [Hint: Here I am asking you to perform comparative statics; use your reduced form solution for the variable 'a' from your answer to part i). ]

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Business Law Principles For Today's Commercial Environment

Authors: David P Twomey, Marianne M Jennings

2nd Edition

0324303947, 9780324303940

More Books

Students also viewed these Economics questions

Question

2. Be clear and descriptive about your own emotions.

Answered: 1 week ago

Question

Case Study: Quality Management System at Coca Cola Company

Answered: 1 week ago

Question

6. How can hidden knowledge guide our actions?

Answered: 1 week ago

Question

7. How can the models we use have a detrimental effect on others?

Answered: 1 week ago