The price elasticity of demand for nursery products is -10. The advertising elasticity of demand is 0.4. Using the "Rule of Thumb for Advertising," the profit maximizing level of advertising will be set at ________ of sales.
A) 0.25 percent
B) 0.4 percent
C) 4 percent
D) 40 percent

Question

Quizplus · Accepted Answer

The "Rule of Thumb for Advertising" suggests that the optimal advertising-to-sales ratio is equal to the advertising elasticity of demand divided by the absolute value of the price elasticity of demand. Here, it would be 0.4 / 10 = 0.04, or 4 percent.

The Price Elasticity of Demand for Nursery Products Is -10