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CA Foundation · Business Economics · Nature and Scope of Business Economics

A firm has two products, X and Y, and a fixed budget for advertising. At the present allocation, the marginal return per rupee is 0.8 for X and 0.5 for Y. According to the equi-marginal principle, the firm should:

The firm should shift advertising spending from Y to X until marginal returns per rupee are equal. X yields a higher marginal return (0.8 versus 0.5), so reallocating towards X raises total returns until diminishing returns equalise the two.

  1. AShift spending from X to Y until marginal returns per rupee are equal
  2. BShift spending from Y to X until marginal returns per rupee are equalCorrect
  3. CSpend equally on both products regardless of returns
  4. DStop advertising Y and spend nothing further on X

Explanation

Total return is maximised when the marginal return per rupee is equal across uses. Since X gives 0.8 and Y only 0.5, moving money from Y to X raises total return. As more is spent on X its marginal return falls and Y's rises, until they equalise. Moving from X to Y does the opposite and lowers total return.

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