Question

In a statement to Gillette's shareholders, its CEO indicated, "Despite several new product launches, Gillette's advertising-to-sales declined dramaticallyto 7 percent last year. Gillette's advertising spending, in fact, is one of the lowest in our peer group of consumer product companies." If the elasticity of demand for Gillette's consumer products is similar to other firms in its peer group (which averages -4), what is Gillette's advertising elasticity? Instruction: Enter your response rounded to two decimal places. Is Gillette's demand more or less responsive to advertising than other firms in its peer group? Less responsive More responsive. It responds the same.

Answer 1

Advertising elasticity is the change in quantity when there is a change in advertisement expenditure.

Advertising elasticity = $\fn_cm \frac{percentage change in quantity}{percentage change in advertisement expenditure}$

=$\fn_cm \frac{-4}{7}$

= 0.571

= 0.6(rounded)

Since elasticity is 0.6 ( that is less than 1), Gillette's demand is less responsive to advertising than other firms in it's peer group. Thus, it is inelastic.