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CMA Foundation · Fundamentals of Business Economics and Management · Forms of Market

A firm in monopolistic competition sells 100 units at Rs 50 each. It spends Rs 1,000 on advertising, which raises sales to 130 units at the same price. Variable cost is Rs 30 per unit and fixed costs are unchanged. What is the net change in profit due to the advertising?

Extra sales of 30 units earn a contribution of Rs 20 each, which is Rs 600. After deducting the Rs 1,000 advertising cost, profit falls by Rs 400. Advertising here raises revenue but costs more than the added contribution.

  1. ARs 600 increaseCorrect
  2. BRs 1,000 decrease
  3. CRs 1,900 increase
  4. DRs 1,500 increase

Explanation

Extra units = 30. Contribution per unit = 50 - 30 = Rs 20, so extra contribution = 30 x 20 = Rs 600. Selling cost is Rs 1,000, so net change = 600 - 1,000 = -Rs 400, a decrease of Rs 400. None of the first three... correction: net is Rs 400 decrease.

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