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Monopoly & Monopolistic Competition: Calculating Marginal Revenue From Advertising

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

A) If the Smith Company spends $200,000 on advertising, what is the marginal revenue from the 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 spend more or less on advertising?

Solution Preview

a. If Smith 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
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Solution Summary

This solution provides calculations for marginal revenue, marginal cost of advertising and a recommendation that the firm should increase spending on advertising.

$2.19