Final answer:
The elasticity of demand refers to the responsiveness of quantity demanded to a change in price. TThe firm's optimal advertising-to-sales ratio can be calculated by dividing the advertising elasticity of demand by the elasticity of demand.
Step-by-step explanation:
The elasticity of demand refers to the responsiveness of quantity demanded to a change in price. It measures the percentage change in quantity demanded resulting from a 1% change in price. A negative elasticity value indicates an inverse relationship between price and quantity demanded.
The advertising elasticity of demand measures the percentage change in quantity demanded resulting from a 1% change in advertising expenditure. A positive elasticity value suggests that an increase in advertising expenditure leads to an increase in quantity demanded.
To determine the firm's optimal advertising-to-sales ratio, we need to find the point where the marginal benefit of advertising equals the marginal cost. This occurs when the elasticity of demand is equal to the advertising elasticity of demand. In this case, the firm's optimal advertising-to-sales ratio can be calculated by dividing the advertising elasticity of demand by the elasticity of demand:
Optimal advertising-to-sales ratio = Advertising elasticity of demand / Elasticity of demand
Substituting the given values:
Optimal advertising-to-sales ratio = 0.12 / -4 = -0.03
Therefore, the firm's optimal advertising-to-sales ratio is -0.03.