ECON 1050 Chapter 14: Economics-1 (1) (dragged) 4

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Figure 14. 6(a) shows that with no advertising, the demand for a firm"s output is not very elastic and its markup is large. Figure 14. 6(b) shows that if all firms advertise, the demand for a firm"s output becomes more elastic. The firm produces a larger quantity, its price falls, and its markup shrinks. One answer is that these firms use advertising to signal the high quality of their products. A signal is an action taken by an informed person or firm to send a message to uninformed people. Coke is a high quality cola, and oke is a low quality cola. If coke spends millions on advertising, people think coke must be good . If it is truly good, when they try it, they will like it and keep buying it. If oke spends millions on advertising, people will think oke must be good .

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