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7. Firms that spend the greatest percentage of their revenue on advertising tend to be firms that sell
a. highly–differentiated consumer goods.
b. goods produced by natural monopolies.
c. agricultural products.
d. products with a limited shelf life such as milk and lettuce.
8. Compared to other firms, firms that sell highly differentiated products likely incur significant costs
associated with
a. advertising.
b. the product-variety externality.
c. intermediate materials.
d. taxes and regulation.
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9. In which of the following product markets are we likely to observe the largest amount of
advertising?
a. markets with highly differentiated products
b. perfectly competitive markets
c. markets in which industrial products are sold
d. markets in which there is very little difference between different firms’ products
10. If we observe a great deal of advertising of men‘s shaving products, we can infer that
a. the market for those products is perfectly competitive.
b. it costs firms very little to produce those products.
c. those products are highly differentiated.
d. firms are irrational in their decisions to advertise.
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11. If we observe a great deal more advertising for Mucinex, an over–the-counter drug, than for a
Grainger drill press, we can infer that
a. more money is spent on Mucinex than on Grainger drill presses.
b. the market for Mucinex is more highly differentiated than the market for Grainger drill presses.
c. Grainger has lower costs of production than Mucinex.
d. Mucinex operates in an oligopoly, while Grainger operates in a monopolistically competitive
market.
12. 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.
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13. Advertising
a. provides information about products, including prices and seller locations.
b. has been proven to increase competition and reduce prices compared to markets without
advertising.
c. signals quality to consumers, because advertising is expensive.
d. All of the above are correct.
14. Which of the following is not an argument made by critics of advertising?
a. Advertising manipulates people’s tastes.
b. Advertising impedes competition.
c. Advertising promotes economies of scale.
d. Advertising increases the perception of product differentiation.
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15. Critics of advertising argue that in some markets advertising may
a. attract products of lower quality into the market.
b. attract less informed buyers into the market.
c. decrease elasticity of demand allowing firms to charge a larger markup over marginal cost.
d. enhance competition in markets to an unnecessary degree.
16. Critics of advertising argue that advertising
a. creates desires that otherwise might not exist.
b. hinders competition.
c. often fails to convey substantive information.
d. All of the above are correct.
17. Critics of advertising argue that advertising
a. creates desires that otherwise might not exist.
b. enhances competition.
c. benefits television viewers who enjoy TV commercials.
d. All of the above are correct.
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18. If advertising reduces a consumer’s price sensitivity between identical goods, it is likely to
a. increase the elasticity of demand for differentiated products.
b. enhance competition and encourage more product diversity.
c. reduce competition and reduce social welfare.
d. encourage the consumption of all homogenous goods.
19. If a firm in a monopolistically competitive market successfully uses advertising to decrease the
elasticity of demand for its product, the firm will
a. be able to increase its markup over marginal cost.
b. eventually have to reduce price to remain competitive.
c. increase the welfare of society.
d. reduce its average total cost.
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20. Critics of advertising argue that advertising
a. creates demand for products that people otherwise do not want or need.
b. lowers barriers to entry into an industry because new firms can more easily establish
themselves as competitors.
c. increases competition by providing information about prices.
d. encourages monopolization of markets by raising entry barriers.
21. Which of the following is a commonly-cited benefit of advertising?
a. Advertising can be a signal of the quality of a product.
b. Advertising impedes competition.
c. Advertising reduces the deadweight loss associated with monopolistic competition.
d. Advertising encourages free entry, which increases profits.
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22. Defenders of advertising
a. concede that advertising increases firms’ market power.
b. concede that advertising makes entry by new firms more difficult.
c. contend that firms use advertising to provide useful information to consumers.
d. All of the above are correct.
23. When firms in a monopolistically competitive market engage in price-related advertising,
defenders of advertising argue that
a. the quality of products sold in the market always increases.
b. customers are less likely to be informed about other characteristics of the product.
c. new firms are discouraged from entering the market.
d. each firm has less market power.
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24. Defenders of advertising argue that it is not rational for profit-maximizing firms to spend money
on advertising for products that have
a. superior quality.
b. inferior or mediocre quality.
c. low prices.
d. limited availability.
25. The primary claim of defenders of advertising is that it
a. conveys information about firm profitability.
b. is psychological rather than informational.
c. enhances the information available to consumers.
d. reduces the elasticity of demand for a firm’s product.
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26. Evidence suggests that, in markets with differentiated products but little advertising,
a. consumers are not confused by conflicting signals.
b. firms are generally less profitable.
c. markets are less efficient.
d. consumers make better choices.
27. In markets where restrictions on advertising have been used to curtail competition, the U.S. courts
have generally
a. referred the matters of advertising restrictions to executive regulators.
b. enforced industry-wide agreements to restrict advertising.
c. been silent on the effect of explicit advertising restrictions.
d. overturned laws that prohibit advertising.
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28. A law that restricts the ability of hotels/motels to advertise on billboards outside of a resort
community would likely lead to
a. no change in profits for all hotels/motels.
b. reduced efficiency of local lodging markets.
c. a request by consumers to increase the number of billboards.
d. increased price competition among hotels/motels in the community.
29. Among arguments for and against advertising, both sides agree that advertising leads to
a. higher prices and less competitive markets.
b. higher prices and more competitive markets.
c. lower prices and more competitive markets.
d. None of the above is correct. The debate fails to resolve the question of advertising’s effect on
prices and competition.
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30. Professional organizations and producer groups have an incentive to
a. restrict advertising in order to enhance competition on the basis of price.
b. restrict advertising in order to reduce competition on the basis of price.
c. encourage advertising in order to reduce competition on the basis of price.
d. encourage advertising in order to enhance competition on the basis of price.
31. Evidence from the market for eyeglasses suggests that advertising leads to
a. lower-quality products for consumers.
b. lower prices for consumers.
c. higher prices for consumers.
d. less concern on the part of consumers about price differences among similar goods.
32. In the study done by Lee Benham on advertising for eyeglasses,
a. advertising increased the average price.
b. advertising decreased the average price.
c. there was no difference in price, but quality was better in the states that didn’t allow advertising.
d. advertising appeared to have no effect whatsoever in the states that permitted advertising.
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33. Results of the study done by Lee Benham on advertising for eyeglasses would suggest that
a. brand loyalty and market power in the eyeglass market was likely to be more pervasive in
states that allowed advertising.
b. eyeglass sales were more profitable in states that allowed advertising.
c. optometrists would not be supportive of advertising restrictions.
d. optometrists would enthusiastically endorse advertising restrictions.
34. In Lee Benham’s 1972 article examining the impact of advertising on the average price paid for a
pair of eyeglasses, Benham found that
a. the average price paid for eyeglasses was nearly 20% higher in the states that did not restrict
advertising.
b. the average price paid for eyeglasses was nearly 20% lower in the states that did not restrict
advertising.
c. there was no difference in the average price paid between states that restricted advertising and
those that did not.
d. the average price paid for eyeglasses was almost 5 times higher in the states that did not
restrict advertising.
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35. A study of the market for optometrists’ services in the 1960s showed that
a. all states in the United States prohibited advertising by optometrists.
b. almost all professional optometrists opposed legal restrictions on their rights to advertise.
c. the average price of eyeglasses would decrease if the legal restrictions on advertising by
optometrists were removed.
d. advertising on eyeglasses limited competition among optometrists.
36. According to one theory, advertising sends a signal to consumers about the quality of the product
being offered. An implication of this theory is that
a. the actual quality of the product is irrelevant.
b. the content of the advertisement is irrelevant.
c. advertising is not in the best interest of society.
d. it is irrational for firms to pay famous people large amounts of money to appear in their
advertisements.
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37. Advertising that uses celebrity endorsements is most likely intended to
a. increase elasticity of demand for the advertised product.
b. reduce the ability of markets to allocate resources efficiently.
c. provide a signal of product quality.
d. be useful only for psychological effects.
38. Firms that spend a large amount of money on advertising a particular product are likely to be
providing consumers with
a. information about the availability of the product.
b. information about product price.
c. a signal of product quality.
d. a good example of wasted resources.
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39. One theory of advertising suggests that
a. advertising is more effective for industrial products than consumer products.
b. the content of advertising may be irrelevant to product success in the market.
c. regulations limiting advertising benefit consumers, but not producers.
d. television advertising is more effective in reducing competition than ads on websites.
40. Advertisements that appear to convey no information at all
a. are usually associated with “infomercials.”
b. are useless to consumers but valuable to firms.
c. are useless to firms but valuable to consumers for their entertainment quality alone.
d. may convey information to consumers by providing them with a signal that firms are willing to
spend significant amounts of money to advertise.
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41. Television advertisements aired during major sporting events are very expensive. A theory
asserting that people buy a product simply because it is advertised would suggest that information
on the high cost of advertising
a. enhances the effectiveness of the advertisement.
b. reduces people’s willingness to purchase advertised products.
c. is leaked to discredit the firms that spend so much on advertising.
d. reduces the effective staying power of a product.
42. A firm can signal the high quality of its product by
a. spending nothing on advertising to convey that the product is so good that the firm does not
even need to advertise.
b. spending a large amount of money on advertising.
c. getting a patent for the product.
d. not worrying about getting a patent for the product.
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43. According to the signaling theory of advertising, consumers
a. pay little or no attention to which firms advertise and which firms do not advertise.
b. are often more impressed by a firm’s willingness to spend money on advertising than they are
by the content of the advertisement.
c. are often more impressed by low-cost advertisements than they are by high-cost
advertisements.
d. gain little or no information about product quality from advertisements.
44. Adibok knows that it produces and sells high quality athletic shoes. Wurkout knows that it
produces and sells low quality athletic shoes. According to the signaling theory of advertising,
a. both Adibok and Wurkout have incentives to spend large amounts of money on advertising for
their athletic shoes.
b. Adibok has an incentive to spend a large amount of money on advertising for its athletic shoes,
but Wurkout does not.
c. Wurkout has an incentive to spend a large amount of money on advertising for its athletic
shoes, but Adibok does not.
d. neither Adibok nor Wurkout has an incentive to spend a large amount of money on advertising
for their athletic shoes.
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45. AllClean knows that it produces and sells very effective laundry detergent. NotQuiteWhite knows
that it produces and sells ineffective laundry detergent. According to the signaling theory of
advertising,
a. both AllClean and NotQuiteWhite have incentives to spend large amounts of money on
advertising their products.
b. AllClean has an incentive to spend a large amount of money on advertising its detergent, but
NotQuiteWhite does not.
c. NotQuiteWhite has an incentive to spend a large amount of money on advertising its detergent,
but AllClean does not.
d. neither AllClean nor NotQuiteWhite has an incentive to spend a large amount of money on
advertising their detergents.
46. The LookGood BePopular (LGBP) Clothing Company embarked on a new advertising campaign
in which a group of young beautiful people are having fun eating out at a restaurant wearing the
company’s clothes. Critics of advertising argue that this advertisement
a. causes demand for LGBP Clothing to be less elastic.
b. is more effective than other forms of advertisement because of its content.
c. will cause the market to be more competitive.
d. Both a and b are correct.
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47. 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.
48. Most businesses advertise their products and services. Some business use SPAM emails to
advertise because the cost of a mass e-mail is close to zero. Other business spend millions of
dollars to advertise in a 30-second spot during the Super Bowl. Having observed this real world
data, economists argue that the amount of money that a business spends on advertising is a proxy
for a good or service’s
a. size.
b. quality.
c. newness.
d. cost of production.