6. Which of the following statements a) Price advertising helps enforce cartel a
ID: 1130354 • Letter: 6
Question
6. Which of the following statements a) Price advertising helps enforce cartel agreements, thereby raising prices and hurting b) If advertising is primarily persuasive rather than informative, then there is probably too concerning advertising are correct? consumers little advertising (less than the efficient level). c) Professional groups such as lawyers and doctors favor permitting advertising because it helps limit entry into their professions. d) States that permitted optometrists to advertise had higher prices for glasses, because the optometrists had to cover their advertising expenses. e) Restrictions on advertising can make it more difficult for new firms to enter an industry. Suppose that a film studio rents its movies for two weeks to the three theaters in its distribution system. The studio has two movies to rent, an A and a B level movie. The valuations of the two movies by theater are shown in the table below. Assume that the studio must charge the same rents to all theaters. Assume that if a theater is indifferent between any two options, it chooses the one preferred by the studio. Theater Film A Film B Theater 1 $12,000 Theater 2 $6,000 $3,000 $5,000 $14,000 Theater 3$7,000 Use this information to answer questions (7)-(9) If the studio rents each film separately, its maximum revenue is: a) $36,000 b) $34,000 7.Explanation / Answer
6 a) Price Advertising helps enforce cartel agreements, thereby raising prices and hurting consumers.
Incorrect
Price Advertising does not lead to cartel agreements. Mutual agreement between the seller deciding on price and market share lead to cartel agreements.
b) If advertising is primarily persuasive rather than informative, then there is probably too little advertising.
Correct
Informative advertising is to inform the consumers about the product and requires much of advertising whereas in persuasive advertising the consumers are persuaded to buy specific products by way of showing comparisons between the brands. Thus persuasive advertising does not require much of advertising.
c) Professional groups such as lawyers and doctors favor permitting advertising because it helps limit entry into their profession.
Incorrect
By Advertising, professional groups such as lawyers and doctors are able to make the people aware of their services and thus increase their sales.
d) States that permitted optometrists to advertise had higher prices for glasses,because the optometrists had to cover their advertising expenses.
Correct
Advertising is a selling cost which needs to be covered at the time of selling the products. Thus firms incurring high advertising costs charge high prices for their products.
e) Restrictions on advertising can make it more difficult for new firms to enter an industry.
Correct
If a market puts restrictions on advertising,new firms are not able to make the consumers aware about their product and thus beocmes difficult for the new firm to enter the market.
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