IAI Actuarial Core Principles · Business Economics · Impact of advertising on sales and demand
A mutual fund house in Mumbai estimates an advertising elasticity of demand of 0.6 for its SIP sign-ups. It currently has 50,000 monthly sign-ups and plans to raise advertising spend by 20%, other factors constant. Using the elasticity, what is the expected number of monthly sign-ups after the increase?
Expected sign-ups are 56,000. Multiplying the elasticity of 0.6 by the 20% advertising increase gives a 12% rise in sales, and 12% of 50,000 is 6,000 extra sign-ups, taking the total from 50,000 to 56,000.
- A56,000Correct
- B60,000
- C55,000
- D52,000
- 53,000
Explanation
Percentage rise in sales = 0.6 x 20% = 12%. New sign-ups = 50,000 x 1.12 = 56,000. Option 60,000 wrongly treats the elasticity as 1 giving 20%. Option 55,000 applies 10%, and 52,000 only 4%.
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