You are a marketing advisor, and the firm you're advising has an advertising budget which is...
You are a marketing advisor, and the firm you're advising has an advertising budget which is 10% of revenues. After some research, you've found that the advertising elasticity of revenues is .3, and that the incremental effect of advertising, while positive, declines with higher levels of advertising. Assuming that advertising increases the quantity sold for a given price but does not affect the cost of production, how would you advise the firm about changing its advertising budget: should it be increased, decreased, or left the same? Explain the reasoning for your recommendation, using a formula.
Homework Answers
10 % increase in advertisement will lead to rise in revenue of 3 % only. Thus, it is not profitable to make expenditure on advertisement. 10 Dollar expenditure on advertisement would fetch only dollar 3 in form of revenue.
Hence, here expenditure on advertisement must be reduced.
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