📚 Learning Guide
Graphing Monopolistic Competition
hard

In a monopolistically competitive market, how does an increase in advertising strategies typically affect consumer surplus, assuming demand remains constant?

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Choose the Best Answer

A

It increases consumer surplus due to higher product differentiation.

B

It decreases consumer surplus by raising prices.

C

It has no effect on consumer surplus.

D

It increases consumer surplus by reducing production costs.

Understanding the Answer

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Answer

In a monopolistically competitive market, an increase in advertising can lead to higher consumer awareness and potentially higher demand for a specific product. This means that consumers may be more willing to buy that product, even at a higher price, because they perceive it as more desirable or unique due to the advertising. As a result, the producer can increase their prices, which might reduce consumer surplus, the difference between what consumers are willing to pay and what they actually pay. For example, if a new soda brand uses catchy ads to attract attention and raises its price, some customers might still buy it because they feel it is special, but those who are price-sensitive might feel worse off. Overall, while advertising can enhance a product's appeal, it may lead to a decrease in consumer surplus if prices rise significantly.

Detailed Explanation

When companies spend more on advertising, they often raise their prices. Other options are incorrect because Some might think that more advertising makes products better and increases choice; It's a common belief that advertising doesn't change prices.

Key Concepts

monopolistic competition
consumer surplus
advertising strategies
Topic

Graphing Monopolistic Competition

Difficulty

hard level question

Cognitive Level

understand

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