Discuss the role of product differentiation and advertising in monopolistic competition
What will be an ideal response?
Firms acquire market power through product differentiation, distinguishing their products from similar products offered by competitors. Product differentiation promotes market power by convincing consumers that a particular firm's product is superior to the products offered by its rivals. One way to create differentiation is through advertising. Successful advertising increases demand for a firm's product and makes its demand more inelastic. Although advertising increases costs, if the increase in revenue from sales generated by advertising exceeds the cost, the firm's profit will increase.
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If an upstream monopoly and a downstream monopoly vertically integrate into a profit-maximizing monopoly, then the total amount of deadweight loss in the industry
A) will increase. B) will decrease. C) will remain unchanged. D) cannot be determined.
If peanuts were widely accepted for purposes of exchange, then
A) peanuts would be money. B) peanuts would be less valuable than they are currently. C) we would observe people using peanuts to purchase cars. D) a and c E) a and b