Answer to Question 1
e
Answer to Question 2
Situation 1 (maintain the status quo): Consider a situation where consumers have well-established brand preferences. Demand would not be very price elastic or advertising elastic. Profits would be maximized by basically adhering to the status quo and maintaining the present price and advertising levels.
Situation 2 (build image via increased advertising): In a situation where demand is more advertising elastic than price elastic, it is advisable to spend relatively more on advertising increases than price discounts. This situation is likely for new products, luxury goods, and products characterized by symbolism and imagery.
Situation 3 (grow volume via price discounting): This situation is characterized by mature consumer goods markets where consumers have complete information about most brands in the category and brand switching is frequent. Because brands are little differentiated, the market is more price than advertising elastic. Profit increases are obtained more from price discounts than advertising investments.
Situation 4 (increase advertising and/or discount prices): This is a situation where the market is both price elastic and advertising elastic. This would be expected when brands in the product category are inherently differentiable and for products that are seasonal. In this situation, informative advertising can influence consumers' beliefs about product attributes, but because brands are similar, consumers also are eager to compare prices.
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