Problem: The Smith's Company's marketing manager has determine that the price elasticity of demand for its product equals -2.2. According to the studies he has carried out, the relationship between the amount spent by the firm on advertising and its sales 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
1) If the Smith Company spends $200,000 on advertising, what is the marginal revenue from the extra dollar of advertising?
2) Is $200,000 the optimal amount for the firm to spend on advertising?
3) If $200,000 is not the optimal amount, would you recommend that the firm spend more or less on advertising?