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Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050

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BuyFindarrow_forward

Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050
Textbook Problem

If advertising makes consumers more loyal to particular brands, it could __________ the elasticity of demand and ____________ the markup of price over marginal cost.

a. increase, increase

b. increase, decrease

c. decrease, increase

d. decrease, decrease

To determine
Advertising and branding in monopolistic competition.

Explanation

Option (c):

Advertising and branding fosters brand loyalty, thereby decreasing elasticity of demand for the product and increasing its price over its marginal cost. Thus, option ‘c’ is correct.

Option (a):

Advertising and branding results in brand loyalty; this makes demand inelastic. Therefore, option ‘a’ is incorrect...

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