The Wilson Company's marketing manager has determined that the price elasticity of demand for its product equals -2.2. According to studies she 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 the Wilson Company spends $200,000 on advertising, what is the marginal revenue from an extra dollar of 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 spends more or less on advertising?