Chapter 68, Problem 5MCQ

To determine

To choose: The statement that is true with regards to advertising expenditures in monopolistic competition.

Answer to Problem 5MCQ

The correct answer is option d, i.e., attempt to create popular brand names.

Explanation of Solution

Monopolistic competitors will always try to create popular brand names in order to draw consumers’ attention and thus gain profit.

Monopolistic competition is where there are differentiated goods, there are many firms and there is the freedom to enter and exit.

Monopolistically Competitive firms as the name suggest have 1 feature which is the same as a monopoly i.e. (a differentiated product that provides market power), and one feature which is the same as a competitive firm i.e., (freedom of entry and exit). This type of market structure is the same in market-based economies, and a grocery store shows huge numbers of differentiated products: laundry soap, toothpaste, breakfast cereal, biscuits, etc.

So, with the differentiated products, the monopolistic competitors go to create a popular brand name that the consumer will relate to and with the help of which the consumer will purchase similar products in the future. Thus, advertisement expenditures are very important for a monopolistic firm and the firm should try to maximize its profits by advertising its products on a large scale.

So, the correct answer is d, i.e., attempt to create popular brand names.