the elacity of demand for a firma product is 2 and its adve

the elacity of demand for a firm\'a product is - 2 and its advertising elasticity of demand is 0.1.

a. determine the firm\'s optimal advertising -to-sales ratio?

b. if the firm\'s revenues are $50,000, what is its profit-maximizing level advertising?

Solution

a.

Optimal advertising-to-sales ratio = (Advertising elasticity of demand) / (Elasticity of product demand)

                                                         = 0.1 / 2

                                                         = 0.05 (Answer)

b.

Profit maximizing level of advertising = Required revenue × Optimal advertising-to-sales ratio

                                                               = $50,000 × 0.05

                                                               = $2,500 (Answer)