Homework Answers
Answer:
a) Firm's optimal advertising to sales ratio: 0.12
Working:
A/R = Advertising Elasticity of demand / (-Elasticity of demand of product) = 0.18 / 1.5 = 0.12
b) Profit-maximizing level of advertising: 3,600
Working:
A/R = Elasticity of demand - Advertising / Elasticity of demand - Product
A / 30,000 = 0.12
A= 30,000 * 0.12 = 3,600
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