A)Explain why the return on investment in advertising diminishes as more is invested in advertising.

I understand that ROI= (Gain from investment – Cost of Investment)/Cost of Investment. I guess I could say that the more you invest in advertising (Cost of Investment) the more it pulls away from your Gain from investment. Seems like I need a better way to explain this and I’m not sure how to go about explain the answer.

B)Explain why the price elasticity of demand for a product is a major determinant of company profitability.

I answered the question just not sure if it’s the best answer. Any suggestions?

My Answer: A company must understand what the consumers are willing to pay for their product. To do this a company must understand if their product or service is inelastic or if it is elastic. If a product or service is inelastic than consumer’s demand is not very sensitive to changes in price. This means that a company can hike up the price on the product or service to create a larger margin of profit. On the other hand an elastic product or service means that demand for the product or service is very sensitive to a change in price. If a company chargers too much for the product or service they will lose demand and overall lose money. It is important for a company to find a perfect equilibrium between price and demand for an elastic product so that they can maximize their profit.

Thanks much for the help!

A) The diminishing returns on investment in advertising can be explained by the concept of saturation. As you invest more and more in advertising, you are likely to reach a point where the target audience has already been exposed to your message multiple times. This means that additional advertising investments may have less impact and generate diminishing returns.

To explain this concept further, you can use the example of a television commercial. When a commercial first airs, it can capture the attention of a large audience who may not have been aware of your product or service. However, as you continue to run the same commercial repeatedly, the impact on viewers decreases because they have already been exposed to it multiple times. Eventually, the return on investment in advertising decreases because the additional investments do not bring in as many new customers or increase sales as significantly.

B) Your answer is on the right track, but to further explain why the price elasticity of demand for a product is a major determinant of company profitability, you can use some additional examples and concepts.

Price elasticity of demand refers to how sensitive the demand for a product is to changes in price. If the demand is highly elastic, it means that even a small change in price can have a significant impact on the quantity demanded. In this case, a company needs to price their product carefully to maximize profitability.

For example, if a product is highly elastic and the company tries to increase the price, the demand may drop dramatically. As a result, the company may lose a significant number of customers, leading to a decrease in sales and ultimately reducing profitability. On the other hand, if the product has inelastic demand, the company can increase the price without losing many customers, leading to higher profits.

Therefore, understanding the price elasticity of demand is crucial for companies to set their pricing strategy. By finding the right balance between price and demand, companies can maximize their profitability and avoid any adverse effects that come from incorrectly pricing their products or services.