Because monopolistically competitive firms produce differentiated products, adve
ID: 1155450 • Letter: B
Question
Because monopolistically competitive firms produce differentiated products, advertising is widespread as firms try to attract new customers or to capture customers from rival firms. However, advertising can have both benefits and costs. Let’s see how.
1st attempt
(a) A successful advertising campaign will cause the firm’s demand to
.
(b) The firm's demand curve becomes more
.
(c) In the short run, a successful advertising campaign will enable the firm to charge a price
average costs.
Although there are potential benefits to advertising, it does not come without costs. Suppose the figure below shows the average cost curves of American Eagle before and after advertising.
(a) If American Eagle advertises, it wants to move from point
.
(b) But American Eagle competes with many other rivals, who will also advertise. Each firm’s advertising campaign cancels out the others.The net effect is for American Eagle’s average cost to move from
.
Explanation / Answer
Benefits-
A.A successful advertising campaign will shift the demand curve to the right because new customers will be attracted to buying the product.
B.Demand will become more elastic.
C.In the short run the firm will be able to charge a price higher than the average cost(firm earns positive profits in the short run).
Costs-
A If the company advertises it wants to move from from 1 to 2 increasing output and reducing average cost.
B.The net effect would only be the same output as before but higher AV(3) because the effect of advertising cancels out.