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

A mutual fund house finds that its advertising makes investors less sensitive to fee differences between its schemes and those of rivals, because investors now see its brand as distinctive. What is the effect on the demand curve for its schemes?

The demand curve becomes steeper because demand is less price elastic. Advertising that builds brand differentiation makes investors see fewer close substitutes, so a fee rise loses fewer customers. It does not become fully vertical, since some investors would still switch if fees rose sharply.

1. AIt becomes flatter, as demand is more price elastic
2. BIt becomes steeper, as demand is less price elasticCorrect
3. CIt shifts left with no change in slope
4. DIt becomes horizontal at the market fee level
5. It becomes vertical at current sales volume