A monopolist estimates that the own price elasticity of demand for its product i

Question

A monopolist estimates that the own price elasticity of demand for its product is -4.5 and its advertising elasticity of demand is 1.5. Assuming elasticities are constant what fraction of the firms revenues should the firm reinvest in advertising to maximize profits?
A monopolist estimates that the own price elasticity of demand for its product is -4.5 and its advertising elasticity of demand is 1.5. Assuming elasticities are constant what fraction of the firms revenues should the firm reinvest in advertising to maximize profits?

Explanation / Answer

The fraction of firms revenue that should be re-invested in advertising to maximize profit:-

= 1.5 / 4.5

= 0.3333 i.e., 33.33 %. [Equivalent to One-third]

Conclusion:- 33.33 % i.e., One-third portion of the revenue of the firm should be reinvested in advertising to maximize the profits of firm.

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