Suppose a firm expects sales of about $45 million for the coming year. The firm’s marketing department has estimated that a 1 percent increase in advertising would increase sales by about 0.7 percent, and that a 1 percent increase in the firm’s prices would reduce the quantity sold by about 2.8 percent. What is the firm’s price elasticity of demand? Its advertising elasticity of demand? What is the optimal amount for the firm to spend on advertising in the coming year?
Suppose a firm expects sales of about $45 million for the coming year. The firm’s marketing department has estimated that a 1 percent increase in advertising would increase sales by about 0.7 percent, and that a 1 percent increase in the firm’s prices would reduce the quantity sold by about 2.8 percent. What is the firm’s price elasticity of demand? Its advertising elasticity of demand? What is the optimal amount for the firm to spend on advertising in the coming year?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Suppose a firm expects sales of about $45 million for the coming year. The firm’s marketing department has estimated that a 1 percent increase in advertising would increase sales by about 0.7 percent, and that a 1 percent increase in the firm’s prices would reduce the quantity sold by about 2.8 percent.
What is the firm’s
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