Skip to content

IAI Actuarial Core Principles · Business Economics · Impact of advertising on sales and demand

A bank's marketing team observes that each additional ₹1 crore of advertising on a credit card produces smaller gains in new cardholders than the previous ₹1 crore. Which feature of the sales response to advertising does this describe?

This describes diminishing marginal returns to advertising. As spending rises, the market becomes saturated and each extra crore produces fewer new customers, so the sales response curve flattens even though sales still rise.

  1. AIncreasing returns to advertising, as in the early campaign stage
  2. BDiminishing marginal returns to advertising, with a saturating response curveCorrect
  3. CA perfectly elastic demand curve for the card
  4. DA negative advertising elasticity
  5. A shift in the supply curve of credit cards

Explanation

Typical sales-response curves flatten as spending grows because the market becomes saturated and the audience has already been reached. Hence each extra rupee adds less to sales. Negative elasticity would mean sales fall as advertising rises, which is not described.

Did you get it right without looking?

One question tells you little. A timed set on Impact of advertising on sales and demand shows your real accuracy, how long you take and where you lose marks.

Practise Impact of advertising on sales and demandFree diagnostic mock

More Impact of advertising on sales and demand questions