Question

A)Explain why the return on investment in advertising diminishes as more is invested in advertising.

I understand that ROI= (Gain from investment – Cost of Investment)/Cost of Investment. I guess I could say that the more you invest in advertising (Cost of Investment) the more it pulls away from your Gain from investment. Seems like I need a better way to explain this and I’m not sure how to go about explain the answer.

B)Explain why the price elasticity of demand for a product is a major determinant of company profitability.

I answered the question just not sure if it’s the best answer. Any suggestions?

My Answer: A company must understand what the consumers are willing to pay for their product. To do this a company must understand if their product or service is inelastic or if it is elastic. If a product or service is inelastic than consumer’s demand is not very sensitive to changes in price. This means that a company can hike up the price on the product or service to create a larger margin of profit. On the other hand an elastic product or service means that demand for the product or service is very sensitive to a change in price. If a company chargers too much for the product or service they will lose demand and overall lose money. It is important for a company to find a perfect equilibrium between price and demand for an elastic product so that they can maximize their profit.

Thanks much for the help!