The Springfield Bank received 1,500 inquiries following its latest advertisement describing its "establish a Certificate of Deposit (CD)-get a free CD (compact disk)" promotion in the Springfield Shopper, a local newspaper. The most recent similar ad in a similar advertising campaign was in the Brockman Business Newsletter. A local business publication generated 500 inquiries. Each ad in the Springfield Shopper costs $500. Each ad in the Brockman Business Newsletter costs $125. Inquiries from both publications have the same success rate in turning inquiries into sales.(a) Assuming that additional ads will generate similar response rates, is Springfield Bank running an optimal mix of ads in the Springfield Shopper and the Brockman Business Newsletter? Why or why not?(b) If you
claim that the Springfield Bank is currently running an optimal mix of ads, clearly explain why they are using an optimal mix of ads. If you claim that the Springfield Bank is currently not running an optimal mix of ads, clearly explain how the Springfield Bank can better manage the ads.
What will be an ideal response?
Profit maximization requires cost minimization. So the key question is whether Springfield Bank is minimizing the cost of generating inquirers into its financial products through its choice of advertising. We should compare the bang-for-buck ratios of advertising in the Springfield Shopper and advertising in the Brockman Business Newsletter. The bang-for-buck ratio is the ratio of marginal product to unit cost for each form of advertising. Since the bang-for-buck ratio is higher for the Brockman Business Newsletter than for the Springfield Shopper, the bank should reduce advertising in the Springfield Shopper and increase advertising in the Brockman Business Newsletter. At the optimal amount of advertising in each publication, the bang-for-buck ratios would be equal.
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