Solving for Optimal Advertising Units in Managerial Economics

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In summary, the conversation discusses a managerial economics problem involving a firm's sales and advertising in two different media, television and magazines. The first part (a) asks for the optimal level of advertising units that maximizes sales, which is found to be 15 units for television and 20 units for magazines. The second part (b) asks for the level of advertising units that maximizes sales subject to a budget constraint of 31 units, which is found to be 13 units for television and 18 units for magazines. The conversation also mentions the use of the Lagrangian method and the importance of prices in solving similar problems.
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[SOLVED] Managerial Economics Problem

SOLVED

A firm has decided through regression analysis that its sales (S) are a function of the amount of advertising (measured in units) in two different media, television (x) and magazines (y):

S(x, y) = 100 – x
2 + 30x – y2 + 40y

(a) Find the level of TV and magazine advertising units that maximizes the firm's sales.
(b) Suppose that the advertising budget is restricted to 31 units. Determine the level of advertising (in units) that maximizes sales subject to this budget constraint.
(c) Give an economic interpretation for the value of the Lagrangian Multiplier obtained in part (b) above.

I already solved (a) by finding the derivative with respect to (x,y) and equating to 0.
(a) X* = 15, Y* = 20

My prof provided the answer to (b) and I have absolutely no idea to how he arrived at it.
I assumed the the Income(M)=31 but without any given prices for (x,y), I cannot seem to apply it into a Lagrangian method.
(I'm assuming I use the Lagrangian method because it was the most recent lecture to this question. (c) also asks a follow up question which requires the Langrangian multiplier.)
Could anyone help me?


(b) X* = 13, Y* = 18
 
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  • #2
Try $x+y=31$, and plug this into your sales function, thus reducing it to a function of a single variable. The bounds on $x$, say, are $x\in[0,31]$. Use the standard Calculus I technique for maximization.
 
  • #3
Thanks.
I just realized that I had been so used to my instructor's problems where he provides the prices for each product that I had no idea what to do when he doesn't give any prices.
(It works on problems which are similar to the one I just asked for.)
 

FAQ: Solving for Optimal Advertising Units in Managerial Economics

What is Managerial Economics?

Managerial Economics is the application of economic theory and principles to solve management problems and make decisions in a business setting. It combines economic theory, quantitative analysis, and strategic thinking to help managers make informed and efficient decisions.

Why is Managerial Economics important?

Managerial Economics helps managers understand the economic environment in which their business operates and make strategic decisions that will maximize profits and minimize costs. It also helps businesses stay competitive and adapt to changing market conditions.

What are some common problems in Managerial Economics?

Some common problems in Managerial Economics include cost analysis, pricing strategies, supply and demand analysis, production and resource allocation, and market structure analysis. These problems are all related to making strategic decisions that will maximize profits and minimize costs for a business.

How does Managerial Economics differ from traditional economics?

Managerial Economics focuses on the application of economic theory and principles to solve practical management problems, while traditional economics focuses on the theoretical understanding of how markets and economies function. Managerial Economics also takes into account the goals and constraints of a business, whereas traditional economics focuses on the overall economy.

What skills are important for a Managerial Economist?

Some important skills for a Managerial Economist include strong analytical and problem-solving skills, the ability to think strategically and make informed decisions, knowledge of economic theory and principles, and strong communication and interpersonal skills to effectively convey findings and recommendations to management and stakeholders.

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