Question

Suppose that you are a business consultant for Trade Kings. You are tasked to assess the impact of increase in advertising budget and increase in price at the same time on total revenue using the following three important pieces of information:
(a) The company is expected to sell $100 thousand worth of the product.
(b) It is estimated that a 1% increase in the advertising budget would increase the quantity sold by 0.35%.
(c) It is also estimated that a 1% increase in the product's price would reduce quantity sold by 0.25%.
By how much total revenue increases/decreases?

Answer 1

If initial quantity is Q and initial price is P,

Initial total revenue (R) = P x Q = 100,000

After advertising increases, new quantity (Qa) = Q x 1.0035

After price increases, new quantity (Qp) = Q x 1.0025

After both the changes, net new quantty (Q1) = Qa + Qb = Q x (1.0035 - 1.0025) = Q x 1.001

New price (P1) = 1.01 x P

New total revenue (R1) = P1 x Q1 = (1.01 x P) x (Q x 1.001) = 1.01101 x (P x Q) = 1.01101 x 100,000 = 101,101

Increase in revenue = R1 - R = 101,101 - 100,000 = 1,101