The Economics of Advertising

Question 1 Bandwagon advertisin" rel="nofollow">ing communicates the idea that many other people are usin" rel="nofollow">ing the advertised product. Examples in" rel="nofollow">include Pepsi’s mid-1980s campaign that proclaimed itself the “The choice of a new generation” and Proactive’s claim of bein" rel="nofollow">ing “America’s #1 Skin" rel="nofollow">in Care Product.” Another example is Apple’s taglin" rel="nofollow">ine, "iPhone 5. Lovin" rel="nofollow">ing it is easy. That's why so many people do.” Usin" rel="nofollow">ing the complementary model of advertisin" rel="nofollow">ing, explain" rel="nofollow">in how bandwagon advertisin" rel="nofollow">ing works. Question 2 Suppose you’re the marketin" rel="nofollow">ing director for a consumer products firm. Your firm expects its sales to be 10 000 000 € this year. Your marketin" rel="nofollow">ing research suggests that a 1 percent in" rel="nofollow">increase in" rel="nofollow">in advertisin" rel="nofollow">ing would in" rel="nofollow">increase the quantity sold by 0.05 percent and that a 1 percent in" rel="nofollow">increase in" rel="nofollow">in price would reduce quantity demanded by 0.2 percent. a) How much money should you budget for advertisin" rel="nofollow">ing this year? b) Now suppose that the estimate of the demand elasticity is revised, and that a 1 percent in" rel="nofollow">increase in" rel="nofollow">in price suggests that quantity demanded would fall by 0.5 percent. How would your advertisin" rel="nofollow">ing budget change considerin" rel="nofollow">ing the new estimate? c) Based on the different price elasticities in" rel="nofollow">in parts (a) and (b), explain" rel="nofollow">in how the price elasticity affects advertisin" rel="nofollow">ing expenditures.