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Determining optimal level of advertising

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The Wilson Company's marketing manager has determined that the price elasticity of demand for its products equals -2.2. Accordingly 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. 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?

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Solution describes the steps for determining optimal expenditure on advertising.

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Solution :

a. If the Wilson Company spends $200,000 on advertising, what is the marginal revenue from an extra dollar of advertising?
Marginal Revenue=Change in sales /Extra dollar of advertising = (1.5 million -1.3 ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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