You own a small bookstore. You have hired a marketing firm to calculate your own price elasticity of demand and your advertising elasticity of demand. The firm has provided you with the relevant numbers regardless of minor adjustments in price or advertising budget. Your own price elasticity of demand is around -1.7, and your advertising elasticity of demand is around 0.05. What should your approximate advertising-to-sales ratio be?
A) $1 /2$ of 1 percent.
B)1 percent.
C)3 percent.
D)34 percent.

Question

Quizplus · Accepted Answer

The formula for advertising-to-sales ratio is advertising expenditure divided by sales revenue. Using the given advertising elasticity of demand, we can estimate the percentage increase in sales that would result from a 1% increase in advertising budget. This would be 0.05% (0.05 multiplied by 1%). To maintain a constant ratio of advertising expenditure to sales revenue, we would need to increase advertising expenditure by 0.05% for every 1% increase in sales revenue. So, if we aim for an advertising-to-sales ratio of 3%, we would need to spend 0.05% for every 1% increase in sales revenue to maintain this ratio. Therefore, the best choice would be C. The advertising-to-sales ratio can be calculated by multiplying the advertising elasticity by the current percentage of sales spent on advertising. In this case, the advertising elasticity is 0.05 and there is no given current percentage of sales spent on advertising. However, the question asks for the approximate ratio, so we can assume a reasonable percentage to be around 6%. Therefore, the advertising-to-sales ratio would be 0.05 x 6% = 0.003, or 0.3%, which is closest to choice C of 3%.

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