Problem 1: Optimization of Pay Per Click bids in Search Engine Advertising Definitions "Impressions" - the instances that search advertisements are displayed to users. "Click" - the instance of someone clicking on an advertisement. Only a fraction of impressions results in clicks. "Order" - the instance of someone making a purchase after clicking on an advertisement. Only a fraction of clicks results in orders. A few notes to consider regarding Search Engine Advertising Note that the search engine advertising environment often displays ads for multiple advertisers in response to a given search. The ads that are displayed in higher positions on the page almost always generate a higher number of clicks. When someone clicks a search engine ad, the company that placed the ad pays a given fee for that click (a pay-per-click-fee). By bidding higher that other companies on the page for a given search, an advertiser can get a higher position and generate more clicks. Scenario You are currently in position 2 of a paid search term, the click-through rate (customer clicks per impression) is 1% and the cost per click is $1.50 You can get into position 1 by paying $2.50 per click. In position 1 , you expect a click-though rate of 1.5% In position 3 you would pay $0.50 cost per click, and have a click-though rate of 0.5% Regardless of the position of the ad, 10% of people who click will place an order. Your total profit margin per order (before search costs) is $30. In other words. you make $30 every time someone orders. Our goal is to maximize absolute $ profit Questions A) What is the cost per order in position 2 ? B) What is the cost per order in position 1 ? C) Which of the 3 positions do you want to be in? D) At what click through rate in position 1 are you indifferent between positions 1 and 2 ? E) What is the cost per order of the orders you gain by moving up from position 3 to position 2 ? Please show all your analysis, leave formulas in cells, and specify any assumptions you make