Question 1 (a)
Additional advertising lead to a smaller and smaller increase in sales of a particular product due to the increase in demand. Through advertising, more customers will be aware of the existence of the product in the market hence they will have an interest in buying such a product. Considering that customers always want to try new products in the market, advertising would increase demand, which will in turn increase sales (Sloman, Norris & Garratt 2014, p. 143-149). Additional advertising leads to inelastic demand. This implies that buying habits of customers does not depend on the changes in price. Therefore, even if the price of a product changes during additional advertising, there will be a smaller and smaller increase in sales of a particular product
Question 1 (b) (i)
Firms are always concerned about their competitors hence they tend to stay at a fixed price. They do not want to raise their price because they will face an elastic demand curve. This implies that if they raise their prices, they will lose many customers. Conversely, lowering prices will also not increase demand since there will be a price war (Dwivedi 2010, p. 301). Therefore, the demand curve will be kinked around their fixed price and they will not have an incentive to either lower or increase their prices.
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