The figure given below shows the revenue and cost curves of a monopolistically competitive firm.Figure 12.4
MR: Marginal revenue curve
ATC: Average total cost curve
MC: Marginal cost curve
-Martin is in the market for a new television set. He is deciding between two sets: one is rather expensive but offers a guarantee; the other has a lower price but offers no guarantee. Martin's decision to buy the expensive set would indicate that:
A)Martin does not know a good deal when he sees it.
B)Martin interpreted the guarantee as a signal of quality.
C)Martin did not shop around to get a better deal.
D)Martin is not maximizing his utility.
E)Martin has a high income.

Question

The figure given below shows the revenue and cost curves of a monopolistically competitive firm.Figure 12.4
  MR: Marginal revenue curve
ATC: Average total cost curve
MC: Marginal cost curve
-Martin is in the market for a new television set. He is deciding between two sets: one is rather expensive but offers a guarantee; the other has a lower price but offers no guarantee. Martin's decision to buy the expensive set would indicate that:
A)Martin does not know a good deal when he sees it. 
B)Martin interpreted the guarantee as a signal of quality. 
C)Martin did not shop around to get a better deal. 
D)Martin is not maximizing his utility. 
E)Martin has a high income.

Quizplus · Accepted Answer

Martin's decision to buy the expensive set indicates that he interpreted the guarantee as a signal of quality. This is a common phenomenon in the market where consumers associate higher prices with higher quality. Therefore, Martin may be willing to pay a premium for the guarantee because he believes that it signals higher quality and will provide him with greater value in the long run.

The Figure Given Below Shows the Revenue and Cost Curves