zlacker

>A film studio, or its investors, might very well prefer a 50% chance of a $5,000,000 profit on a $20,000,000 budget than a 70% chance of a $500,000 profit on a $500,000 budget.

That's not how it work: a rational actor would take the $20 million and invest it in 40 different films costing $.5 million each if he could make an expected profit of $.5 million on each of the 40 cheap films.

In other words, a rational economic actor will keep adding employees (or any other expense) as long as adding employees increases profits, but will not keeping adding assets as long as doing so increases profits because assets have opportunity costs.

To account for the opportunity costs, investors commonly speak of return on investment (profit divided by amount invested) rather than profit, because that is really what they're trying to maximize. Recasting what I just wrote in the new, crisper language, the rational actor will add any employee, any other cost and any investment to a firm as long as doing so increases return on investment.

>>holler+(OP)
Yes, I guess I was implicitly assuming that the investor only had these two options, which might be a good model some of the time, but not typically. You're absolutely right in the more general long-term case.

>>holler+(OP)
I think there is real quantity constraints. For the most part, the number of Theatre screens are fixed. You can pack them in or have have seats 10% full.

There is also saturation points for advertising where customers don't respond.