A firm has $200,000 to spend on either direct sales or advertising. Suppose further that if the $200,000 is spent on direct sales, it will bring in an accounting profit of $40,000 . Instead, the (accounting) profit it could obtain from a $200,000 investment in advertising is $X. Compare the profitability of the two options if (a) X = 50,000 . (b) X = 30,000 . or (c) X = 40,000
If X = 50,000 . then economic profit of direct sales is less than zero, so advertising must be a more profitable investment.
If X = 30,000 . then economic profit is greater than zero, because direct sales, which yields $40,000 . is the more profitable investment choice.
If X = 40,000 . then economic profit is equal to zero, and the two investment options are equally profitable.
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