CA CHAPTER 16-03

1. Some firms have an incentive to advertise because they sell a

a. homogeneous product and charge a price equal to marginal cost.
b. homogeneous product and charge a price above marginal cost.
c. differentiated product and charge a price equal to marginal cost.
d. differentiated product and charge a price above marginal cost.
2. For the economy as a whole, spending on advertising comprises about what percent of total
firm revenue?
a. 0.5
b. 2
c. 10
d. 20
3. Firms that spend the greatest percentage of their revenue on advertising tend to be firms that
sell
a. industrial products.
b. homogeneous products.
c. consumer goods for which there are no close substitutes.
d. highly-differentiated consumer goods.
 4. Firm A produces and sells in a market that is characterized by highly differentiated
consumer goods. Firm B produces and sells industrial products. Firm C produces and sells
an agricultural commodity. Which firm is likely to spend the greatest portion of its total
revenue on advertising?
a. Firm A.
b. Firm B.
c. Firm C.
d. There is no reason to believe that any one of the three firms would spend a greater
portion of its total revenue on advertising than the other two firms.
5. Economists John Kenneth Galbraith and Friedrich Hayek disagreed about the roles of
advertising and government. Which of the following is correct?
a. Galbraith thought advertising artificially enhanced consumers’ desires for private
goods, while Hayek thought no producer could “determine” consumers’ tastes
though advertising.
b. Galbraith believed in enhancing personal freedoms, while Hayek advocated larger
government.
c. Galbraith thought advertising was a waste of resources because it did not influence
consumers, while Hayek thought advertising was powerful enough to “determine”
consumers’ tastes.
d. Galbraith believed that the government should not interfere in markets, while
Hayek believed that there was insufficient government regulation of marketing.
6. How does advertising signal to consumers that the product is a good one?
a. By seeing famous people using the product, consumers infer that they too can be
famous.
b. By being willing to spend money on advertising, firms let consumers know the
product is likely a good one since firms would not likely advertise a poor product.
c. By making consumers laugh during commercials, firms are associating positive
experiences with the product.
d. Without allowing consumers to actually use the product, it is not possible for firms
to signal to consumers the product's quality.
7. It has been said that many of the patrons in McDonald’s restaurants in foreign locations are
American tourists. A likely reason why many Americans dine at McDonald’s while
vacationing abroad is
a. they can’t get enough McDonald’s food when they are at home.
b. they know and trust the quality associated with the McDonald’s brand name.
c. the food at local restaurants is of inferior quality.
d. that Americans, by their nature, are not very adventurous.
8. When monopolistically competitive firms advertise, in the long run
a. they will still earn zero economic profit. (P = ATC but not at its min)
b. they can earn positive economic profit by increasing market share.
c. the market price must fall.
d. the market price must rise.