Question

Advertising is not worth a monopolistically competitive company's resources when:

a) Average total cost is increased beyond the price.
b) It causes consumers to act irrationally.
c) It is vague about the product's features.
d) It increases demand.

Answer 1

In monopolistic competition, advertising is not worthwhile if it doesn't increase demand or make the demand curve more inelastic, especially if option a. it raises costs beyond the price or if the advertisement is ineffective.

Step-by-step explanation:

Advertising in a monopolistically competitive market is not worth a company's resources when it does not lead to an increase in demand or when it does not make the demand curve more inelastic. If advertising increases average total cost beyond the price received for the product, it may not be justifiable. When advertisements are vague or cause irrational consumer behavior, they may also fail to differentiate the product effectively, negating the purpose of advertising in such competitive markets.

A successful advertising campaign in a monopolistically competitive market should lead to a shift of the firm's perceived demand curve to the right, allowing the firm to sell a greater quantity, charge a higher price, or both. If the efforts of advertising simply neutralize the efforts of competitors, leading to no net gain, then the resources spent on advertising may be considered wasted.