Suppose a company wants to determine what its optimal advertising budget is. It gives two different consultants a database of information and asks each to independently calculate the demand relationships taking into account price, quantity, and advertising.
a) The first consulting company comes back and says the demand is Q = 10,000 P3.33A0.5. The corporation uses MC= 0.70 and the economic rule to calculate the advertising budget that optimizes profits. Show the amount of the optimal advertising budget and how you calculated it.
The second consulting company comes back and says the demand is Q = 25 – .3P + 1.5 A2and estimates that the price elasticity is (-3.0). Again the corporation uses MC=0.70. What amount of advertising does it find optimal? Show how you calculated the optimal amount.
Consulting Co. #1 Consulting Co. #2
b) The corporation decides to there are two alternative ways to use the information: 1) choose one of the two; 2) combine the two (using the probability that the consultants are correct (65% and 35%)). Evaluate each of the alternatives explaining your reasoning and make a recommendation to the company