Question

In monopolistic competition, an increase in a firm's "advertising" A) increases the firm's marginal cost. B) has no effect on demand. C) has no effect on its average cost curves. D) increases the firm's average total cost.

Answer 1

Answer: The correct answer is "D) increases the firm's average total cost.".

Explanation: In monopolistic competition, an increase in a firm's "advertising" increases the firm's average total cost.

In monopolistic competition A company with a differentiated product needs to make sure that consumers know how it differs from those of competitors. Companies use advertising and packaging to achieve this goal. A large proportion of the price we pay for a good is used to cover the cost of selling it. Advertising expenses affect the company's economic profits in two ways: they increase costs and modify demand.