Suppose you own a business and your own price elasticity is -2. In addition, suppose your advertising elasticity of demand is 0.50. If your marginal cost per unit is $4, what is your optimal advertising-to-sales ratio?
A)0.25
B)0.375
C)0.625
D)1.25

Question

Quizplus · Accepted Answer

The optimal advertising-to-sales ratio is given by the formula $A/S = \frac{1}{|E_p|} \times E_a$, where $E_p$ is the price elasticity of demand and $E_a$ is the advertising elasticity of demand. Substituting the given values, $A/S = \frac{1}{|-2|} \times 0.50 = \frac{1}{2} \times 0.50 = 0.25$.

Suppose You Own a Business and Your Own Price Elasticity