Problem
You, as the CEO of company A, need to determine the budget of advertising for next year. Department of marketing provides you following information:
A. The company is expected to sell $10 million worth of product.
B. It is estimated that a 1 percent increase in the advertising budget would increase quantity sold by 0.05 percent.
C. It is estimated that a 1 percent increase in the product's price would reduce quantity sold by 0.2 percent.
1. Show Dorfman-Steiner condition and calculate the amount of money you would allocate for advertising next year.
2. Now, suppose that Department of marketing revised its estimation regarding the demand price elasticity to 1 percent increase in price resulting in a reduction in quantity sold by 0.5 percent. How much money would you allocate to advertising after getting the revised estimate? How does a change in the demand price elasticity affect advertising expenditure? Explain.