In the cereal advertising example with Post and Kellogg, Kellogg advertises its great-tasting cereal for $10 million because it expects sales of $36 million. Post does not advertise its mediocre cereal because it would only generate $3 million in sales. This illustrates that:
Explanation
This question applies the concept of advertising as a signal. The key insight is that advertising can be profitable for a high-quality product because the advertising cost is recouped through repeat sales. For a low-quality product, the lack of repeat sales makes the same advertising expenditure unprofitable. Consumers can rationally use this information.
Other questions
Which of the following is NOT an attribute of a monopolistically competitive market?
In the short run, a monopolistically competitive firm chooses its price and output level by following which rule?
What happens in the long run if firms in a monopolistically competitive market are earning positive economic profits?
Which of the following is a key difference between the long-run equilibrium in a perfectly competitive market and a monopolistically competitive market?
The term 'excess capacity' in a monopolistically competitive market refers to the fact that:
The product-variety externality is a __________ externality associated with the entry of a new firm into a monopolistically competitive market because consumers _________.
The business-stealing externality arises in monopolistically competitive markets because:
According to the critique of advertising, how does advertising impede competition?
In the 1972 study by Lee Benham on advertising for eyeglasses, what was the key finding?
The theory of advertising as a signal of quality suggests that:
How do defenders of brand names argue that they benefit consumers?
A monopolistically competitive firm is in long-run equilibrium. If price is $15 and average total cost is $15, what is the relationship between price and marginal cost?
Consider a market for novels. A publisher pays an author $2 million. The marginal cost of printing a book is zero. The publisher estimates it can sell 100,000 copies to die-hard fans at $30 each, or 500,000 copies to all potential readers at $5 each. To maximize profit, what single price should the publisher charge?
Why do policymakers often have difficulty addressing the inefficiencies in monopolistically competitive markets?
Which of the following industries is explicitly mentioned in Chapter 16 as an example of monopolistic competition?
The concentration ratio measures the:
If a firm in a monopolistically competitive market finds that its price is less than its average total cost in the short run, it will:
A key behavioral difference between a monopolistically competitive firm and a perfectly competitive firm is that the monopolistic competitor:
According to the analysis in Chapter 16, which of the following is NOT a potential source of inefficiency in a monopolistically competitive market?
Firms that sell highly differentiated consumer goods like breakfast cereals and soft drinks typically spend what percentage of their revenue on advertising?
The long-run equilibrium of a monopolistically competitive firm is characterized by the firm's demand curve being tangent to which other curve?
In the long-run equilibrium of a monopolistically competitive market, firms produce on the:
Which of the four market structures is described as having many firms selling identical products?
Why do firms in a monopolistically competitive market have an incentive to advertise?
If a monopolistically competitive firm's marginal revenue is greater than its marginal cost, the firm should:
The deadweight loss that arises in monopolistic competition is a result of:
According to the case study on eyeglass advertising, the average price of eyeglasses in states that prohibited advertising was $33 in 1963. In states that did not restrict advertising, the average price was $26. Advertising reduced average prices by approximately what percentage?
A key argument in defense of brand names is that they:
Which of the following statements is true for a monopolistically competitive firm in long-run equilibrium?
How does the demand curve faced by a monopolistically competitive firm compare to that faced by a monopoly?
The price of books greatly exceeds the marginal cost of printing one additional copy. This fact is an example of:
In a monopolistically competitive market with N firms, the demand curve for an individual firm is given by Q = 100/N – P. Total Cost is TC = 50 + Q-squared, and Marginal Cost is MC = 2Q. In the long run, how many firms will exist in this market?
According to the summary table in Chapter 16, which feature does monopolistic competition share with monopoly, but not with perfect competition?
If a government forced a monopolistically competitive firm that is in long-run equilibrium to charge a price equal to its marginal cost, the firm would:
What is the primary reason a monopolistically competitive firm's marginal revenue is less than its price?
Which of the following is an example of the 'business-stealing' externality?
If a monopolistically competitive market has 'too much' entry from the perspective of social welfare, it means that:
Which type of firm is LEAST likely to spend money on advertising?
Economist Edward Chamberlin, an early developer of the theory of monopolistic competition, concluded that brand names were:
A firm in a monopolistically competitive market is making a profit in the short run. What will happen to its demand curve in the long run?
The relationship P > MC in a monopolistically competitive market means that:
Which of the following would NOT be considered a monopolistically competitive market?
If a monopolistically competitive firm is in long-run equilibrium, it is producing a quantity where its demand curve:
What does the Galbraith versus Hayek 'FYI' box in Chapter 16 illustrate?
In the long run, a monopolistically competitive firm's price equals its __________, but is greater than its __________.
Why do firms in a monopolistically competitive industry have 'excess capacity'?
An old quip suggests that in monopolistically competitive markets, sellers send Christmas cards to buyers. This is because:
Which of the following is NOT a characteristic of an oligopoly?
If a firm is in a monopolistically competitive market, its marginal revenue curve will be: