If signalling is applied to advertising:
A)a firm with a good product reaps a relatively small benefit from advertising
B)firms ignore the possibility of repeated customers
C)it is rational for a firm with a good product to pay for the cost of the signal
D)all firms have the same incentive to advertise

Question

Quizplus · Accepted Answer

If signalling is applied to advertising, it means that firms can use advertising to signal the quality of their product to potential customers. In this case, a firm with a good product will benefit more from advertising because they can use it to signal their high-quality product to potential customers. Therefore, it is rational for a firm with a good product to pay for the cost of the signal. Firms may still consider the possibility of repeated customers, but the main focus will be on signalling quality to attract new customers. Therefore, choices A, B, and D are incorrect.

If Signalling Is Applied to Advertising