IAI Actuarial Core Principles · Business Economics · Impact of advertising on sales and demand
A mutual fund company spends ₹40 lakh a year on advertising and sells units worth ₹800 crore. Management estimates advertising elasticity of sales at 0.05. If advertising is raised by 25% with all else constant, what is the approximate increase in sales?
Sales rise by about ₹10 crore. A 25% increase in advertising with an elasticity of 0.05 raises sales by 1.25%, and 1.25% of ₹800 crore equals ₹10 crore.
- A₹1 crore
- B₹10 croreCorrect
- C₹20 crore
- D₹50 crore
- ₹200 crore
Explanation
Sales change % = 0.05 × 25% = 1.25%. Applied to ₹800 crore this gives ₹10 crore. Using 12.5% (a decimal slip) would give ₹100 crore, and ignoring the elasticity gives ₹200 crore.
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