Makers of disposable diapers must advertise 5% more to offset completely the 2% decline in sales due to heightened environmental concern.The advertising elasticity of demand is:
A) 4.0.
B) 0.4.
C) 2.5.
D) 0.25.
E) 0.20.

Question

Quizplus · Accepted Answer

The formula for advertising elasticity of demand is:
Advertising elasticity of demand = percentage change in quantity demanded / percentage change in advertising
Here, the percentage change in advertising is 5%, and the percentage change in quantity demanded is -2% (due to heightened environmental concerns). 
So, the advertising elasticity of demand = -2% / 5% = -0.4 
Since advertising elasticity of demand is negative, we take the absolute value to get 0.4. Therefore, the answer is B.

Makers of Disposable Diapers Must Advertise 5% More to Offset