The Wilson Company\'s marketing manager has determined that the price elasticity

Question

The Wilson Company's marketing manager has determined that the price elasticity of demand for its product equals -2.2. According to studies he carried out, the relationship between the amount spent by the firm on advertising and its sales is as follows:
Advertising Expenditure Sales
$100,000 $1.0 million
200,000 1.3 million
300,000 1.5 million
400,000 1.6 million
a. If Wilson Company spends $200,000 on advertising, what is the marginal revenue from an extra dollar on advertising?
b. Is $200,000 the optimal amount for the firm to spend on advertising?
c. If $200,000 is not the optimal amount, would you recommend that the firm spend more or less on advertising?

Explanation / Answer

A. this is the change in P/change in Q 0.3 million/100,000=3 B. 200,000 is not the optimal amount to spend since the demand for advertising is inelastic. In this case they can still increase the advertising and increase total revenue. C. We would recommend the firm to spend more on advertising. We can see as advertising increases, expenditure sales also increases. From the information given, we cannot tellif the optimal advertising is 400,000 or if it is greater than 400,000. Hope this helps

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