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Advertising, Price, Cost, Supply and Demand Curve

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o Advertising can inform buyers, but sellers must incur costs to advertise. If so, advertising can result in higher prices to consumers. Does this mean advertising is economically inefficient? If not, explain how it can simultaneously create value
and increase market prices.

o Following are observations on the market price and the quantity of good X produced and consumed in three different years: $10 and 100 units, $4 and 57 units, and $8 and 88 units. Can we conclude that the market demand for X slopes upward?

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Solution Preview

On Advertising and Price

The study of Benham (1972) showed that "prices [of eyeglasses] were found to be substantially lower in states which allowed advertising".

This is corroborated by Ferguson (1982) when he wrote that advertising does not increase prices. He further commented that consumers are more at a disadvantaged situation in the absence of advertising : "... the cost to consumers of choosing products by using alternative sources of source of information in the absence of advertising exceeds the cost of using advertising".

Another study by Capella,et. al (n.d.) empirically analyzed that "advertising did not ...

Solution Summary

The solution discusses advertising costs and economic efficiency brought by it It shows that advertising does not necessarily result in higher prices to consumers.
The other query calls for the behavior of the market demand and market supply.

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Managerial Economics

Jim owns and manages a Dine-In Barbeque Restaurant. He has been in business for over 10 years and his restaurant has a steady patronage. Consider how each of the following scenarios impacts the market for Jim's product. You need to state whether the scenario will impact the industry demand curve or supply curve and state the direction that the curve will shift.

a. A severe drought has created a shortage of tomatoes. Jim makes his own barbeque sauce. One of the main ingredients of his sauce is fresh tomatoes.
b. Jim launches a successful advertising campaign on the local cable TV station.
c. A new barbeque competitor opens up across town.
d. A new factory opened up in the town. The factory employs 1200 people and the average income of Jim's city has increased significantly because of this. Assume that barbeque is a normal good.

30. Sophia owns a quilting shop. Recently, her suppliers increased the cost of their fabrics. Sophia would like to pass on the cost to her customers, but she does not know what impact that will have on her total revenue. Last year, when she passed on a similar price increase, she had the following results:

Price before increase = $10 per yard

Price after increase = $12 per yard

Quantity sold before increase = 120 yards

Quantity sold after increase = 90 yards

a. Calculate the elasticity of demand using the midpoint method.
b. State whether the demand elasticity that you calculated is elastic, inelastic, or unitary
elastic.
c. Recommend whether or not she should pass on the price increase to her customers.

31. Kevin and Lilly make and sell rustic lamps. Their primary inputs are cedar logs, electrical wire, and lamp shades. They have three hourly employees that they bring on when the number of orders that they receive increases. They advertise on billboards that require yearly contracts and work out of a rented office space under a yearly rental agreement. They produce 50 lamps a month. Their monthly costs are as follows:

Advertising = $500

Cedar Logs = $250

Electric Wire = $ 300

Hourly Wages = $550

Kevin and Lilly's Salary = $1,200

Lamp Shades = $700

Rent = $1,500

a. Divide the costs into fixed and variable. Calculate the total cost, total fixed cost, and
total variable cost.
b. Calculate the average total cost, average variable cost and average fixed cost.
c. Name two things that can be done in the long-run that business are unable to do in
the short-run?

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