Monopoly & Monopolistic Competition
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?
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