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If a firm in a monopolistically competitive market successfully uses advertising to lower the elasticity of demand for its product, the firm will
a. be able to increase its markup over marginal cost.
b. eventually have to reduce price to remain competitive.
c. increase the welfare of society.
d. reduce its average total cost.

Respuesta :

jepessoa

Answer:

A) be able to increase its markup over marginal cost.

Explanation:

Price elasticity of demand (PED) measures how much the quantity demanded of a product will change if the price of the product changes by 1%. The higher the PED, the more the quantity demanded will change for every one percent increase or decrease in price.

  • PED > 1, the demand is elastic
  • PED < 1, the demand is inelastic
  • PED = 1, the demand is unit elastic

If the company is able to lower the elasticity of its product, it means that it will make it more inelastic. Inelastic demand means that a change in the product's price will cause a smaller proportional change in the quantity demanded.

For example, in a monopolistically competitive market the firm must sell its product at a price that equals its marginal cost, for example $10. If the PED is inelastic, the firm will be able to increase its price to $11 (10% price increase) since the quantity demanded for the product will decrease at an smaller proportion, e.g. 5 or 6%

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