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?

Question

Quizplus · Accepted Answer

To calculate the approximate advertising-to-sales ratio, we need to use the formula: Advertising Elasticity of Demand x Sales Elasticity of Demand. 
In this case, the advertising elasticity of demand is 0.05 and the sales elasticity of demand is -1.7. 
So, the approximate advertising-to-sales ratio would be 0.05 x (-1.7), which equals -0.085. 
However, since an advertising-to-sales ratio cannot be negative, we take the absolute value of -0.085, which is 0.085. 
Therefore, the approximate advertising-to-sales ratio should be roughly 3 percent (0.03 or 3/100).

You Own a Small Bookstore