Mr. Hustle

The Acme Company uses the following budget process for its Public Relations Department.

Before the fiscal year starts, the Public Relations Department proposes a budget and details the quantity of services it will provide if the budget is approved. Usually after the initial request some bargaining takes place between the representatives of the budget office and the head of the Public Relations Department, after which a final budget and set of services are agreed upon.

The head of the Public Relations Department, Mr. Hustle, is known as an "empire builder." He knows that his status, salary, and future promotions are all positively related to the size of his department. His philosophy can be described as "bigger is better." He also knows that he must produce the quantity of services he promises, and so plans accordingly.

While it is extremely difficult for the Budget Office to obtain detailed knowledge of the costs incurred by the Public Relations Department for various output decision they are able to estimate reasonably well the total value to the organization of the total output of the public relations department.

Public relations services are not available anywhere else in the firm, and Acme has a rule forbidding the purchase of such services outside the firm.

1. Do you know a "Mr. (or Ms.) Hustle"?

2. In the figure below, you will see the marginal cost curve for the public Relations Department, and the demand curve (or marginal benefit curve) for the Public Relations Department by the Company. What quantity of PR services would be optimal for the firm to produce in this situation? Why?

3. What quantity do you expect Mr. Hustle to produce? Why?

4. What general strategy do you expect Mr. Hustle to follow if the budget office suggests that his budget should be reduced? Can you provide some example?

5. What quantity would a profit maximizing monopoly public relations department produce if it sold the services on a per unit basis and was constrained to charge a single price?