Answer to Question #16910 in Microeconomics for capitalboy

Question

In an attempt to increase revenues and profits, a firm is considering a 4 percent
increase in price and an 11 percent increase in advertising. If the price elasticity of
demand is −1.5 and the advertising elasticity of demand is +0.6, would you expect
an increase or decrease in total revenues?

Answer 1

Total revenue change = 4% * (- 1.5) = - 6%
Change in advertising = 11% * 0.6 = 6.6%
So, total revenue will decrease because of advertising increase.

Answer: total revenue will decrease.