Question

Which of the following statements is true?

1.If the advertising elasticity of demand is positive, then the demand curve must be upward sloping.

2.If the advertising elasticity of demand declines and consumer demand becomes more price elastic, then the optimal advertising-to-sales ratio declines.

3.If marginal costs are constant, then it is optimal to advertise until the last dollar spent on advertising generates one additional dollar of sales.

4.If the demand curve shifts leftward as the advertising expenditure increases, then the advertising elasticity of demand is positive.

Answer 1

The correct answer is option (a).

Because a positive advertising elasticity indicates that an increase in advertising leads to a rise in demand for the advertised goods or services.

So, if the elasticity is positive , then the demand curve must be upward sloping from left to right which shows that with increase in advertising expenditure, the demand for the goods or services also rises.

Option (b) is wrong because the advertising to sales ratio does not declines rather it increases because in this case with increase in advertising expenditure demand declines.

Option (c) is wrong because if marginal costs are constant it is optimal to spend less on advertising so that the marginal cost declines until the marginal cost declines.

Option (d) is wrong because if demand curve shifts leftward with increase in advertising expenditure , then advertising elasticity of demand is negative and not positive.

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