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.
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.
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.
b.
c.
d.
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.
49. Critics of markets that are characterized by firms that sell brand name products argue that brand names encourage
consumers to pay more for branded products that
a.
have elastic demand curves.
b.
are very different from generic products.
c.
are indistinguishable from generic products.
d.
consumer-advocate groups have found to be inferior.
50. Edward Chamberlin argued that brand names
a.
hampered market efficiency.
b.
were instrumental in enhancing market efficiency.
c.
were useful in enhancing market efficiency when the government enforced the use of exclusive trademarks.
d.
were likely to be more socially efficient when used in conjunction with advertising.
51. Edward Chamberlin argued that governments should
a.
ban the use of brand names.
b.
not enforce the trademarks that companies use to identify their products.
c.
vigorously enforce the trademarks that companies use to identify their products.
d.
tax companies whose products have brand names in proportion to how much consumers recognize their
products.
52. The debate over the efficiency of markets in which products with brand names are sold
a.
is framed by the role of regulation in advertising.
b.
is likely to be resolved by reference to anecdotal evidence.
c.
hinges on whether consumers are rational in their choices.
d.
hinges on the effectiveness of advertising that identifies price differences.
53. A recent outbreak of hepatitis was linked to a national fast-food restaurant chain. This is an example of a case in
which
a.
brand name identity increases the effectiveness of markets.
b.
brand name identity can be detrimental to the profitability of a firm.
c.
advertising is ineffective in salvaging perceptions of product quality.
d.
advertising cannot be used to establish brand loyalty.
54. In some countries, brand name fast-food restaurants are not allowed to operate. Such restrictions are likely to
a.
enhance the social welfare of society.
b.
increase the number of fast-food restaurants.
c.
reduce barriers to entry in imperfect markets.
d.
reduce the competitive nature of local fast-food markets.
55. Piper consumes Ragu spaghetti sauce exclusively. She claims that there is a clear taste difference and that competing
brands of spaghetti sauce leave an unsavory taste in her mouth. However, in a blind taste test, Piper is found to prefer
generic store-brand spaghetti sauce to Ragu spaghetti sauce eight out of ten times. The results of Piper’s taste test would
reinforce claims by critics of brand names that
a.
consumers are always willing to pay more for brand names.
b.
brand names cause consumers to perceive differences that do not really exist.
c.
brand names are always preferred to generics.
d.
consumers are only willing to buy generics if they are less expensive.
56. Roberto consumes Coke exclusively. He claims that there is a clear taste difference and that competing brands of cola
leave an unsavory taste in his mouth. In a blind taste test, Roberto is found to prefer Coke to store-brand cola eight out of
ten times. The results of Roberto’s taste test would refute claims by critics of brand names that
a.
consumers are always willing to pay more for brand names.
b.
brand names cause consumers to perceive differences that do not really exist.
c.
consumers with the lowest levels of income are the most likely to be influenced by brand name advertising.
d.
brand names are a form of socially efficient advertising.
57. Your company has recently requested that you travel to Dhaka, Bangladesh, to work on negotiations for a new factory
to be located in one of the port cities. Your travel agent provides a list of several hundred local hotels and a Sheraton. In
this case, the Sheraton brand-name is likely to be used as a signal of
a.
perceived differences that are not likely to exist among your various options.
b.
quality when quality cannot be easily judged.
c.
inefficiency in markets characterized by recognizable brand names.
d.
the quality of general lodging accommodations in Dhaka.
58. On a vacation to China, you find yourself eating every meal at the local Burger King rather than buying a meal from
one of the street vendors. Your traveling companion claims that you are irrational, since you never eat Burger King
hamburgers when you are home, and Burger King’s hamburgers cost more than the meals prepared and sold by China’s
street vendors. An economist would most likely explain your behavior by suggesting that
a.
your behavior is rational, but your friend’s behavior is clearly irrational.
b.
you are clearly irrational, but your friend’s behavior is rational.
c.
the Burger King brand name suggests consistent quality.
d.
the advertising by Burger King in China is more persuasive than the advertising by Burger King in your home
town.
59. Two college students, Mary and Maggie, are spending spring break in Florida. Mary buys a cup of coffee each
morning at the local Starbucks rather than from one of the local coffee shops. Maggie claims that Mary is irrational
because she never purchases Starbucks coffee at home, and Starbucks coffee costs more than the coffee sold by local
shops. An economist would most likely explain Mary’s behavior by suggesting that
a.
Mary’s behavior is rational, but Maggie’s behavior is clearly irrational.
b.
Mary’s behavior is clearly irrational, but Maggie’s behavior is rational.
c.
the Starbucks brand name suggests consistent quality.
d.
the advertising by Starbucks in Florida is more persuasive than the advertising by Starbucks in Mary and
Maggie’s home town.
60. 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.
61. Two bottles of body wash sit side-by-side in a grocery store: Olay (a brand name) sells for $6.00, while Up and Up
(not a brand name) sells for $3.00. Even defenders of brand names would have to admit that
a.
no rational consumer would spend twice as much for Olay as she would for Up and Up.
b.
the side-by-side presence of these two body washes conveys no useful information to consumers.
c.
Olay has no incentive to maintain the quality of its product just because of the Olay brand name.
d.
None of the above is correct.
62. Two bottles of over-the-counter pain reliever sit side-by-side in a grocery store: Advil (a brand name) sells for $5.00,
while Feel Better (not a brand name) sells for $2.50. In a typical day the store sells some of each type of pain reliever,
which suggests that
a.
no rational consumer would spend twice as much for Advil as he would for Feel Better.
b.
some consumers must perceive that Advil is a higher quality product.
c.
Advil has no incentive to maintain the quality of its product just because of the Advil brand name.
d.
Advil spends money on advertising to reduce competition in the market.
63. Which of the following statements regarding brand names in advertising is not correct?
a.
Brand names provide consumers with information about quality when quality cannot be easily judged in
advance of purchase.
b.
Brand names give firms an incentive to maintain high quality to maintain the reputation of the firm.
c.
Brand names allow firms to produce and sell inferior products in the long run since people will continue to
purchase the brand-name product.
d.
Brand names can cause consumers to perceive differences in products that do not actually exist.
64. Economists defend brand names as useful to consumers because brand names
a.
provide consumers with information about quality when quality cannot easily be judged in advance of
purchase.
b.
give firms a financial incentive to maintain the high quality associated with their brand name.
c.
convince consumers to spend more for products nearly identical to generic versions.
d.
Both a and b are correct.
65. When quality cannot be easily judged in advance, what provides consumers with information about the quality of a
product?
a.
a brand name
b.
a tie–in
c.
the quantity available for sale
d.
the amount of deadweight loss
66. When monopolistically competitive firms advertise, in the long run
a.
they will still earn zero economic profit.
b.
they can earn positive economic profit by increasing market share.
c.
the market price must fall.
d.
the market price must rise.
67. Which of the following statements is not correct?
a.
The typical monopolistically competitive firm could reduce its average total cost if it produced more output.
b.
Monopolistically competitive firms advertise in order to increase the elasticity of the demand curve they face.
c.
Expensive advertising might help consumers if it is a signal that the product is good.
d.
Brand names acquired at great cost might help consumers by assuring quality.
68. Which of the following statements is correct?
a.
The more similar Firm A’s product is to Firm B’s product, the more likely Firm A is to advertise.
b.
Monopolistically competitive firms advertise in order to increase the elasticity of the demand curve they face.
c.
According to the signaling theory, the more product information an advertisement contains, the more effective
it is.
d.
Brand names may help consumers if they provide information about the quality of a product when acquiring
such information is difficult.
69. Which of the following statements is not correct?
a.
Critics of advertising argue that firms advertise to manipulate consumers’ tastes.
b.
Defenders of advertising argue that advertising provides valuable product information to consumers.
c.
An industry with many brand name products will be more competitive than one with many generic products.
d.
The willingness of a firm to spend a large amount of money on advertising can signal the quality of the
product.
Scenario 16-7
Consider the problem facing two firms, YumYum and Bertollini, in the frozen food market. Each firm has just come up
with an idea for a new “frozen meal for two” which it would sell for $9. Assume that the marginal cost for each new
product is a constant $2, and the only fixed cost is for advertising. Each company knows that if it spends $12 million on
advertising it will get 1.5 million consumers to try its new product. YumYum has done market research which suggests
that its product does not have any “staying” power in the market. Even though it could get 1.5 million consumers to buy
the product once, it is unlikely that they will continue to buy the product in the future. Bertollini’s market research
suggests that its product is very good, and consumers who try the product will continue to be consumers over the ensuing
year. On the basis of its market research, Bertollini estimates that its initial 1.5 million customers will buy one unit of the
product each month in the coming year, for a total of 18 million units.
70. Refer to Scenario 16-7. If YumYum decides to advertise its product it can expect to
a.
incur a loss of $15 million.
b.
incur a loss of $1.5 million.
c.
earn a profit of $1.5 million.
d.
earn a profit of $13.5 million.
71. Refer to Scenario 16-7. If Bertollini decides to advertise its product it can expect to
a.
earn a profit of $162 million per year.
b.
earn a profit of $147 million per year.
c.
earn a profit of $114 million per year.
d.
earn a profit of $48 million per year.
72. Refer to Scenario 16-7. Suppose YumYum has an opportunity to create a cheaper advertising campaign in
newspapers rather than on television for its new product. This campaign will cost $8 million and is expected to result in
the same 1.5 million one-time customers. YumYum should
a.
invest in the cheaper campaign because they will earn a profit.
b.
invest in the cheaper campaign because they will signal the high quality of their product.
c.
not invest in the cheaper campaign because they will incur a loss.
d.
not invest in the cheaper campaign because their brand name will be negatively affected.
73. Refer to Scenario 16-7. By its willingness to spend money on advertising, Bertollini
a.
signals the quality of its new product to consumers.
b.
signals that it is not a profit maximizer.
c.
is detracting from the efficiency of markets.
d.
will drive YumYum out of the market.
74. Refer to Scenario 16-7. On the basis of a theory that people buy a product because it is advertised, the content of
advertisements for Bertollini’s product
a.
must show a consumer taste-test to be successful.
b.
must include celebrity endorsements to be successful.
c.
is irrelevant to the success of the advertisement.
d.
Both a and b would be equally successful.
75. Refer to Scenario 16-7. Which of the following is most likely?
a.
Both YumYum and Bertollini will advertise.
b.
Neither YumYum nor Bertollini will advertise.
c.
YumYum will advertise, but Bertollini will not advertise.
d.
Bertollini will advertise, but YumYum will not advertise.
76. Which of the following might be an example of an economic argument against advertising?
a.
It causes the demand for the good to be more elastic
b.
It allows the producer to earn an economic profit in the long run
c.
People may be deluded into thinking that a good with a brand name is better than an otherwise identical
generic brand
d.
The claims made in the ads are almost always false
77. An empirical study compared the price of eyeglasses in states that restricted advertising by optometrists with those
that did not.The study revealed:
a.
That the average price of eyeglasses in states where advertising was restricted was higher than the average
price in states were advertising was not restricted
b.
That the average price of eyeglasses in states where advertising was not restricted was higher than the average
price in states where advertising was restricted
c.
That the average price of eyeglasses did not differ between states where advertising was restricted and those in
which advertising was not restricted
d.
That the greater the level of advertising, the higher the average price of eyeglasses