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

Gupta Foods in Kanpur has a budget of ₹60,000 to spend on advertising in two cities, A and B. The firm shifts spending from the city where an extra rupee of advertising adds less sales to the city where it adds more, until the extra sales per rupee are equal in both cities. Which principle is being followed?

The firm follows the equi-marginal principle. It allocates a limited advertising budget between two uses and keeps shifting money until the marginal sales per rupee are equal in both cities. This allocation maximises total returns from the limited resource.

  1. AEqui-marginal principleCorrect
  2. BIncremental principle
  3. CDiscounting principle
  4. DPrinciple of trade-off between risk and return

Explanation

The equi-marginal principle says a limited resource should be allocated among alternative uses so that the marginal returns per rupee are equal across uses. Gupta Foods reallocates until marginal sales per rupee match in both cities. The incremental principle looks at changes from a single decision, not equalising returns across uses.

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