Its critics claim that when advertising ____ the elasticity of demand,firms are able to ____.
A) decreases; lower their advertising budget
B) increases; become more competitive
C) increases; increase their advertising budget
D) decreases; charge a larger mark-up over marginal cost

Question

Quizplus · Accepted Answer

When advertising decreases the elasticity of demand, firms are able to charge a larger mark-up over marginal cost. This is because when the demand becomes less sensitive to changes in price, firms are able to raise their prices without losing significant amounts of customers. Thus, they can charge a larger mark-up over marginal cost and increase their profits.

Its Critics Claim That When Advertising ____ the Elasticity of Demand,firms