A system anticipates that spending $300,000 on an advertising campaign will incr

Question

A system anticipates that spending $300,000 on an advertising campaign will increase bed days by 650. The marketing department anticipates that each additional bed day will yield $2,100 in additional revenue and will increase costs by $1,700. The campaign

will reduce profits by $40,000.

will increase profits by $40,000.

will increase profits by $90,000.

will increase profits by $210,000.

will reduce profits by $40,000.

will increase profits by $40,000.

will increase profits by $90,000.

will increase profits by $210,000.

Explanation / Answer

Given that the incremental revenue which is also known as marginal revenue is = $2100

And the additional cost or the marginal cost is = $1700

Next the increase in output of bed days is = 650.

So the total revenue would be = additional revenue per bed times the quantity.

revenue = 650 * 2100 = $1365000.

Similarly, cost = 650 * 1700 = $1105000

Also there is an additional cost of advertisement of = $300000.

Total cost = 300000 + 1105000 = $1405000.

Profit = revenue - cost

Profit = 1365000 - 1405000

Profit = -40,000.

Thus the firm would earn a negative profit of $40000.

Option A is correct.

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