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Part $1$

You are a manager at a large soft drink firm like PepsiCo. Each year you sell

$6$ comma $000$ comma $000$ comma $0006,000,000,000$

servings of Mountain Delight at the price of

$$$$0\mathrm{.}4990\mathrm{.}499.$

The$$ long$-$run average gross cost of a serving is constant and is equal to

$$$$0\mathrm{.}400\mathrm{.}40$

per serving. You are thinking of running an additional$30-$second advertisement or an additional$60-$second advertisement during the Super Bowl.

Part $2$

You determine that running the$30-$second advertisement will raise the price consumers are willing to pay for the initial

$6$ comma $000$ comma $000$ comma $0006,000,000,000$

servings by

$$$$0\mathrm{.}0010\mathrm{.}001$

$(1/10$ of a$$ cent$)$ per serving. You also determine that the advertisement will allow you to sell

$500$ comma $000500,000$

more servings at a new price of

$$$$0\mathrm{.}500\mathrm{.}50$

per serving. The price of a$30-$second Super Bowl commercial is

$$$$5$ comma $000$ comma $0005,000,000.$

Should you buy the$$ advertisement? Why or why$$ not?

A$.$

$$Yes$,$ you should buy the advertisement. The marginal benefit from running the advertisement is greater than the marginal cost.$$ So$,$ your firm will earn more profit.

B$.$

$$No$,$ you should not buy the advertisement. There is no change in the additional gross profit from running the advertisement.$$ So$,$ your firm will not earn more profit.

C$.$

$$No$,$ you should not buy the advertisement. The marginal benefit from running the advertisement is lower than the marginal cost.$$ So$,$ your firm will not earn more profit.

D$.$

$$Yes$,$ you should buy the advertisement. The marginal benefit from running the advertisement is equal to the marginal cost.$$ So$,$ your firm will earn more profit.

Part $3$

You determine that running the$60-$second advertisement will raise the price consumers are willing to pay for the initial

$6$ comma $000$ comma $000$ comma $0006,000,000,000$

servings by

$$$$0\mathrm{.}00150\mathrm{.}0015$

per serving. You also determine that the advertisement will allow you to sell

$2$ comma $000$ comma $0002,000,000$

more servings at a price of

$$$$0\mathrm{.}50150\mathrm{.}5015$

per serving. The price of a$60-$second Super Bowl commercial is

$$$$10$ comma $000$ comma $00010,000,000.$

Should you buy the$$ advertisement? Why or why$$ not?

A$.$

NoNo$,$

you

should notshould$$not

buy the advertisement. The marginal benefit from running the advertisement is

lowerlower

than the marginal cost.$$ So$,$ your firm will

not earnnot$$earn

more profit.

B$.$

$$No$,$ you should not buy the advertisement. There is no change in the additional gross profit from running the advertisement.$$ So$,$ your firm will not earn more profit.

C$.$

YesYes$,$

you

shouldshould

buy the advertisement. The marginal benefit from running the advertisement is

greatergreater

than the marginal cost.$$ So$,$ your firm will

earnearn

more profit.

D$.$

$$Yes$,$ you should buy the advertisement. The marginal benefit from running the advertisement is equal to the marginal cost.$$ So$,$ your firm will earn more profit.