Question

3. Suppose you are the owner of a blue jeans company. A market research firm has estimated that the own price elasticity of demand for your product is approximately -1.7. Your marketing department proposed four advertising campaigns, and estimates you company's sales and the advertising costs of each, shown in the table below. Advertising costs $0 $5,000 $10,000 $15,000 $20,000 Sales $100,000 $120,000 $130,000 $138,000 $143,000 What level of advertising should your firm engage in? Why? Explain your answer (Hint: relate it back to Lecture 11).

hand written only please. difficult to follow with typing

Answer 1

Advertising Cost	Increase in Advertising cost	Sales	Increase in sales
$ 5,000	5,000	$ 120,000	20,000
$ 10,000	5,000	$ 130,000	10,000
$ 15,000	$ 5,000	$ 138,000	$ 8,000
$ 20,000	$ 5,000	$ 143,000	$ 5,000

The Blue geans company should adopt the third level of Advertising since, in third level of Advertising te company spend $ 5,000 in Advertising expenses and in return company is earning$8,000. The company can go for fourth option also but there is not benefit of choosing it. The Advertisement cost and sales both increases by $ 5,000. The increase in advertisement cost cuts down the benefit of extra sales. so it is beneficial to choose 3rd level of advertisement cost.

the question of choosing 1st and 2nd level of advertisement doesnot arise because there is still some scope of earning extra in 3rd level and company should go for it.