Consider a firm that sells a particular brand of cereal. The estimate for the elasticity of demand is 2.0 and the estimate of the demand elasticity with respect to advertising expenditures is 0.4. The revenue of the firm is $50 million and it is planning to spend $5 million of that on advertisements.

1. Is the firm spending too little or too much on advertisement? Explain carefully.
2. What do you think is the amount the firms should spend on advertisement?