Skip to content

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

A private health insurer in Pune raises its monthly advertising spend by 10% and observes that policy sales rise by 4%, with all other factors unchanged. What is the advertising elasticity of demand (AED), and how should it be described?

The AED is 0.4, found by dividing the 4% rise in sales by the 10% rise in advertising. Because it is below one, sales respond less than proportionately, so demand is advertising-inelastic. The sign is positive since sales and advertising move in the same direction.

  1. A0.4, advertising-inelastic: sales respond less than proportionately to advertisingCorrect
  2. B2.5, advertising-elastic: sales respond more than proportionately to advertising
  3. C0.4, advertising-elastic: sales respond more than proportionately to advertising
  4. D1.0, unit elastic: sales move in proportion to advertising
  5. -0.4, because advertising spend and sales move in opposite directions

Explanation

AED = % change in quantity demanded / % change in advertising = 4/10 = 0.4. A value below 1 means sales rise less than proportionately, so demand is advertising-inelastic. Option 2 inverts the ratio, giving 2.5. The sign is positive because both variables rise.

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