1. When advertising expenditure is increased, which of the aggregate and average
ID: 1212740 • Letter: 1
Question
1. When advertising expenditure is increased, which of the aggregate and average (cost and revenue) curves shift their positions? Explain the direction of the shift. As an industry moves from being a monopoly to a monopolistically competitive one (due to the entry of new competitors as the monopoly's patents expire, for example), what happens to the elasticity of the demand curve facing the firm? Why?
2.Why is it that firms can earn profits in the long run in monopoly and oligopoly but not in monopolistic competition and perfect competition? What can firms do in monopolistic competition or perfect competition to make the short run last as long as possible since they can only make profits in the short run? Have you observed any firms employ such tactics?
Explanation / Answer
An increase in the advertisement expenditure will result in an increase in the sales at a higher rate. If the organization increases its advertising expenditures, its sales will increase at a higher rate than the rate of increase in advertising expenditures. Aggregate curve would shift, if advertising expenditure is increased. The direction of the shift in curve would be upward.
The demand curve of the firm will become more elastic when an industry moves from being a monopoly to a monopolistically competitive one. This is because when a firm enters monopolistic competition, there is a decrease in the profits. There are a number of firms in the monopolistic competition market, so even if there is a slight change in the price, there will be a significant change in the demand
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