Question

How does a firm make use of the managerial economics to (a) choose the technique of the production. (b) determine its advertising expenditures.

Short answer

#Short Answer# A firm can make use of managerial economics to choose the technique of production by identifying alternative production techniques, calculating their total costs, determining the technique with the lowest variable cost, considering fixed costs, and evaluating scalability. To determine advertising expenditures, a firm can apply marginal analysis and profit maximization by identifying the relationship between advertising and sales, calculating marginal revenues and costs, applying the profit maximization rule, and considering long-term impacts.

Step-by-step solution

(Part A: Choosing the Technique of Production)

To choose the best technique of production, a firm can utilize the principles of managerial economics, with a focus on cost analysis and profit maximization. The steps to do this are as follows: 1. Identify alternative production techniques: A firm should first identify all available production techniques, along with their respective input quantities and costs (such as labor, capital, and raw materials). 2. Calculate the total cost of each technique: For each available production technique, the firm should calculate the total cost of production by adding up the costs of each input. 3. Determine the production technique with the lowest variable cost: Variable cost is the cost that varies with the level of output produced. Among the available techniques, the firm should choose the one with the lowest variable cost per unit of output. 4. Consider the fixed costs: Fixed costs are costs that do not vary with the level of output produced, such as the cost of machinery or rent. The firm should choose the technique that minimizes the sum of variable and fixed costs. 5. Evaluate the scalability of each technique: A firm should also consider how easily each technique can be scaled up or down in response to changes in demand. The technique that provides the greatest flexibility at the lowest cost should be preferred.

(Part B: Determining Advertising Expenditures)

To determine its advertising expenditures, a firm can make use of the principles of managerial economics, particularly marginal analysis and profit maximization. The steps to do this are as follows: 1. Identify the relationship between advertising and sales: A firm should first establish an understanding of how advertising affects its sales. This can be done through surveys, market research, or historical sales data. 2. Determine the marginal revenue of advertising: Marginal revenue is the additional revenue generated from one additional unit of advertising expenditure. To find this, the firm must analyze the incremental sales generated by each additional unit of advertising. 3. Calculate the marginal cost of advertising: Similar to marginal revenue, the firm should understand the incremental cost associated with each additional unit of advertising. 4. Apply the profit maximization rule: To maximize profits, the firm should continue to increase its advertising expenditures as long as the marginal revenue from advertising exceeds the marginal cost. It should stop spending on advertising when the marginal revenue is equal to the marginal cost. 5. Consider the long-term impact of advertising: While the short-term effects of advertising on increasing sales and profits are important, it's also crucial to consider the long-term benefits, such as enhanced brand recognition and customer loyalty. If the long-term benefits of advertising (discounted to their present value) exceed the costs, it's worthwhile for the firm to invest in advertising.