1.Advertising is an extent decision. The profit maximizing advertising-to-sales ratio can be given by A/R = E_Q.A/ E_Q.Pwhere E_Q.Aadvertising elasticity of demand for the firm's product and E_Q.Pis the price elasticity of demand for the firms product. A is advertising $ and sales R=PQ.

a. Suppose the firm's margin is 50% and for each 10% change in advertising expenditure, the firm sells 10% more products. What is the optimal advertising to sales ratio?

b. If demand is sensitive to advertising, should the firm increase its advertising to sales ratio?

c. If the firm is in a competitive market with low margins, should it increase its advertising to sales ratio?