Question 1

In markets with differentiated products but without a lot of advertising,which of the following statements is supported by evidence

Accepted Answer

In markets with differentiated products and limited advertising, consumers may have less information, leading to inefficiencies as they struggle to make informed decisions.

Question 2

Scenario 16-2
Consider the problem facing two firms in the fast-food restaurant market, Firm A and Firm B.Each company has just come up with an idea for a new fast-food menu item, which it would sell for $6.Assume that the marginal cost for each new menu item is a constant $2 and the only fixed cost is for advertising.Each company knows that if it spends $12 million on advertising, it will get 2 million consumers to try its new product.Firm A has done market research which suggests that its product does not have any staying power in the market.Even though it could get 2 million consumers to buy the product once, it is unlikely that they will continue to buy the product in the future.Firm B's market research suggests that its product is very good, and consumers who try the product will continue to be consumers over the ensuing year.On the basis of its market research, Firm B estimates that its initial 2 million customers will buy one unit of the product each month in the coming year, for a total of 24 million units.
-Refer to Scenario 16-2.If Firm A decides to advertise its product,what can it expect to happen

Accepted Answer

Firm A's market research suggests that its product does not have any staying power in the market. Therefore, even if it spends $12 million on advertising and gets 2 million consumers to try its new product, it is unlikely that they will continue to buy the product in the future. As the marginal cost for each new menu item is a constant $2, spending $12 million on advertising will incur a loss of $4 million for Firm A.

Question 3

What is the primary claim of defenders of advertising

Accepted Answer

Defenders of advertising argue that it enhances the amount of information available to consumers. They believe that advertising helps consumers become aware of new products, features, and benefits, and helps them make informed purchasing decisions.

Question 4

What has happened to advertising and competition in markets for professional services such as legal,medical and dental

Accepted Answer

Advertising for professional services has increased due to changes in regulations and technology, leading to enhanced competition as professionals seek to differentiate themselves and attract clients.

Question 5

It is a well-publicized fact that television advertisements aired during major sporting events are very expensive.Therefore,a theory asserting that people buy a product simply because it is advertised would suggest that publicizing information regarding the cost of advertising does which of the following

Accepted Answer

Publicizing the high cost of advertising during major events can enhance the perceived value and effectiveness of the advertisement, as it suggests that the company is willing to invest significantly in promoting the product, potentially increasing consumer interest and trust.

Question 6

If advertising reduces a consumer's price sensitivity between identical goods,it is likely to do which of the following

Accepted Answer

When advertising reduces price sensitivity between identical goods, it can contribute to the creation of brand loyalty and make it difficult for new competitors to enter the market. This impedes competition and reduces social well-being as it limits consumer choice and may lead to higher prices.

Question 7

What do professional organizations and producer groups have an incentive to do regarding advertising,and why

Accepted Answer

Professional organizations and producer groups may restrict advertising to reduce competition on the basis of price, allowing them to maintain higher prices and protect their members' interests.

Question 8

What is the likely intent of advertising that uses celebrity endorsements

Accepted Answer

The likely intent of advertising that uses celebrity endorsements is to provide a signal of product quality. Celebrity endorsements are often viewed as a reliable indicator of the quality of a product, and can influence consumer purchasing decisions.

Question 9

When advertising enhances the ability of markets to allocate resources,what is it most likely to be doing

Accepted Answer

Advertising that conveys information about price, the existence of new products, or locations of retail outlets enhances the ability of markets to allocate resources by improving the flow of information between buyers and sellers. This allows consumers to make more informed decisions about their purchases, which in turn can lead to a more efficient allocation of resources. Choices B and C suggest that advertising is manipulating consumers in some way, which would not enhance market efficiency. Choice D does not directly relate to the ability of advertising to enhance market efficiency.

Question 10

Scenario 16-2
Consider the problem facing two firms in the fast-food restaurant market, Firm A and Firm B.Each company has just come up with an idea for a new fast-food menu item, which it would sell for $6.Assume that the marginal cost for each new menu item is a constant $2 and the only fixed cost is for advertising.Each company knows that if it spends $12 million on advertising, it will get 2 million consumers to try its new product.Firm A has done market research which suggests that its product does not have any staying power in the market.Even though it could get 2 million consumers to buy the product once, it is unlikely that they will continue to buy the product in the future.Firm B's market research suggests that its product is very good, and consumers who try the product will continue to be consumers over the ensuing year.On the basis of its market research, Firm B estimates that its initial 2 million customers will buy one unit of the product each month in the coming year, for a total of 24 million units.
-Refer to Scenario 16-2.If Firm B decides to advertise its product,what can it expect to happen

Accepted Answer

Firm B's total revenue from the 2 million customers purchasing one unit each month for a year would be:
2 million x 12 months x $6 = $144 million
Firm B's total cost would be: 
$12 million for advertising the product + (2 million x $2 cost per unit x 12 months) = $60 million
Therefore, Firm B's profit would be: 
$144 million - $60 million = $84 million.

Question 11

When advertising encourages customers to become more informed about all firms in the market,what is the result

Accepted Answer

When customers become more informed about all firms in the market, it reduces the asymmetry of information and puts all firms on a level playing field. This reduces the ability of individual firms to control the price of their products and gives more power to the customer in terms of making informed choices. Therefore, each firm is likely to have less control over the price of its product.

Question 12

If a firm in a monopolistically competitive market successfully uses advertising to decrease elasticity of demand for its product,what will result

Accepted Answer

By decreasing the elasticity of demand for its product through successful advertising, the firm will be able to have more pricing power, allowing it to increase its markup over marginal cost. This is because consumers are less likely to switch to a competitor's product due to the perceived uniqueness of the advertised product.

Question 13

When consumers are exposed to additional choices due to the introduction of a new product,what do we know

Accepted Answer

When consumers are exposed to additional choices due to the introduction of a new product, a product-variety externality is said to occur. This means that the introduction of a new product can affect the utility of existing products and lead to changes in consumer behavior. It can either increase or decrease the satisfaction of consumers depending on the product and its impact on the existing choices.

Question 14

According to critics of advertising,what might advertising do in in some markets

Accepted Answer

Critics argue that advertising can decrease elasticity of demand by creating brand loyalty or perceived differences, making consumers less sensitive to price changes.

Question 15

What was discovered in the case study about Canada Goose,the Canadian maker of outdoor apparel

Accepted Answer

The case study found that Canada Goose was able to differentiate itself from its competitors through effective advertising campaigns. This suggests that advertising helps in setting a product apart from the competition. The other options are not supported by the case study.

Question 16

The two cereal makers,Post and Kellogg,have each come up with new cereal recipes.Post chooses not to advertise it,but Kellogg chooses to spend $10 million in advertising.Why do the two companies have different advertising strategies

Accepted Answer

The answer of The two cereal makers,Post and Kellogg,have each...

Question 17

With what is the product-variety externality associated

Accepted Answer

The product-variety externality is associated with the consumer surplus that is generated from the introduction of a new product. This is because when a new product is introduced, it increases the range of choices available to consumers, and this variety may increase the utility that they derive from consuming the product. As a result, the demand for other products in the same industry may also increase, which can have spillover effects on other firms. This externality can have positive welfare implications for the society, as it can lead to a more efficient allocation of resources and encourages innovation and competition.

Question 18

What would likely occur if a law was introduced restricting the ability of hotels and motels to advertise on billboards outside of a resort community

Accepted Answer

Restricting the ability of hotels and motels to advertise on billboards outside of a resort community may lead to reduced efficiency of the local lodging markets as hotels and motels would have less visibility to potential customers. However, it is unlikely to directly affect profits or prices charged by hotels, and there is no reason for consumers to request an increase in the number of billboards.

Question 19

When firms in a monopolistically competitive market engage in price-related advertising,what do defenders of advertising argue

Accepted Answer

Each firm has less market power because price-related advertising makes products more similar, which reduces the ability of any one firm to set a higher price than its competitors.

Question 20

Scenario 16-2
Consider the problem facing two firms in the fast-food restaurant market, Firm A and Firm B.Each company has just come up with an idea for a new fast-food menu item, which it would sell for $6.Assume that the marginal cost for each new menu item is a constant $2 and the only fixed cost is for advertising.Each company knows that if it spends $12 million on advertising, it will get 2 million consumers to try its new product.Firm A has done market research which suggests that its product does not have any staying power in the market.Even though it could get 2 million consumers to buy the product once, it is unlikely that they will continue to buy the product in the future.Firm B's market research suggests that its product is very good, and consumers who try the product will continue to be consumers over the ensuing year.On the basis of its market research, Firm B estimates that its initial 2 million customers will buy one unit of the product each month in the coming year, for a total of 24 million units.
-Refer to Scenario 16-2.By its willingness to spend money on advertising,Firm B does which of the following

Accepted Answer

Firm B's willingness to spend money on advertising signals the value of its new product to consumers. It shows that the firm is confident in the quality of its product and is willing to invest in advertising to reach potential customers. This can help to differentiate the product from competitors and attract consumers who are willing to pay the $6 price.

Quiz 16: Monopolistic Competition