9781118041581

in proportion to their advertising spending. (If the firms spend equal

amounts, A 8, they have equal shares of the market, and so on.)

a. Create a spreadsheet modeled on the example shown. Determine the

firm’s optimal advertising expenditure. Refer to the appendix of this

chapter, if you are unsure about finding MR, that is., taking the deriva-

tive of the quotient, A/(A8).

b. Use your spreadsheet’s optimizer to confirm your answer in part (a). Is

matching your rival’s spending your best policy?

60 Chapter 2 Optimal Decisions Using Marginal Analysis

ABCDEF

1

2 AN OPTIMAL ADVERTISING BUDGET

3

4

5 Advertising Revenue Cost Profit

6

7 8.00 10.00 8.00 2.00

8

9

10 MR MC Mprofit

11

12 0.625 1.000 0.375

13

S3. a. Create a spreadsheet describing Amazon’s output and pricing choices

with respect to the Kindle e-reader. (Use the template from Problem S1

with price equation: P $294 35Q and MC $126.) Use your spread-

sheet optimizer to find the combination of output and price that max-

imizes profit.

b. Now include the extra net revenue from e-book sales, $100 per kindle.

(Compute this total in cell C7 according to the formula: 100*B7.)

Finally, in cell H7, compute total profit (from both Kindles and e-book

sales). What combination of Kindle output and price maximizes

Amazon’s total profit? Explain why Amazon should cut its price relative

to the price in part (b).

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