Answer to Question #120393 in Economics for DS

Question

Judge the effects of advertising in shifting the demand curve. Whether adverts are persuasive or informative is a matter of psychological judgement: whether advertising shifts the demand curve is a matter of empirical observation. The determination of an optimal advertising budget requires a comparison of the costs and benefits of advertising that may proceed in various forms, from marginalism through the Dorfman-Steiner theorem to an informational approach.

Answer 1

Advertising shifts the demand curve to the right, as a result both price and quantity demanded will increase. The Dorfman–Steiner theorem is a neoclassical economics theorem which looks for the optimal level of advertising that a firm should undertake. The optimal level of advertising for a firm is found where the ratio of advertising to sales equals the price-cost margin times the advertising elasticity of demand.