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Chapter 15: Problem 10

In each of the following cases, explain how the advertisement functions as a signal to a potential buyer. Explain what information the buyer lacks that is being supplied by the advertisement and how the information supplied by the advertisement is likely to affect the buyer's willingness to buy the good. a. "Looking for work. Excellent references from previous employers available." b. "Electronic equipment for sale. All merchandise carries a one-year, no- questions-asked warranty." c. "Car for sale by original owner. All repair and maintenance records available."

Short Answer

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#tag_title#d. "Freshly baked bread for sale. Made with locally-sourced organic ingredients." #tag_content#A potential buyer lacks information about the quality and origin of the ingredients used in the bread. The advertisement provides a signal to the buyer that the bread is made with locally-sourced organic ingredients, indicating a higher quality product and support for local businesses. This information will increase the potential buyer's willingness to purchase the freshly baked bread due to perceived health benefits, superior flavor, and community support.

Step by step solution

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a. "Looking for work. Excellent references from previous employers available."

A potential employer lacks information about the job applicant's past work experience and credibility. The advertisement provides a signal to the employer that the potential employee can provide excellent references from previous employers, indicating a reliable and likely skilled worker. This information will increase the potential employer's willingness to consider hiring the applicant due to confidence in their work abilities and reliability.
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b. "Electronic equipment for sale. All merchandise carries a one-year, no-questions-asked warranty."

A potential buyer lacks information about the quality and reliability of the electronic equipment being sold. The advertisement provides a signal to the buyer that the equipment comes with a one-year, no-questions-asked warranty, giving the buyer a sense of security and confidence in the product's quality. This information will increase the potential buyer's willingness to purchase the electronic equipment because they know that if any problems arise within the first year, they will be protected by the warranty.
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c. "Car for sale by original owner. All repair and maintenance records available."

A potential buyer lacks information about the car's maintenance history, the original owner's credibility, and how well the car has been taken care of. The advertisement provides a signal to the buyer that the car is being sold by the original owner and all repair and maintenance records are available. This information will increase the potential buyer's willingness to purchase the car because it shows that the car has been properly maintained and the original owner is transparent about its history.

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Most popular questions from this chapter

"In both the short run and in the long run, the typical firm in monopolistic competition and a monopolist each make a profit." Do you agree with this statement? Explain your reasoning.

You are thinking of setting up a coffee shop. The market structure for coffee shops is monopolistic competition. There are three Starbucks shops and two other coffee shops very much like Starbucks in your town already. In order for you to have some degree of market power, you may want to differentiate your coffee shop. Thinking about the three different ways in which products can be differentiated, explain how you would decide whether you should copy Starbucks or whether you should sell coffee in a completely different way.

The market for clothes has the structure of monopolistic competition. What impact will fewer firms in this industry have on you as a consumer? Address the following issues. a. Variety of clothes b. Differences in quality of service c. Price

For each of the following situations, decide whether advertising is directly informative about the product or simply an indirect signal of its quality. Explain your reasoning. a. Football great, Peyton Manning, drives a Buick in a TV commercial and claims that he prefers it to any other car. b. A Craigslist ad states, "For sale: 1999 Honda Civic, 160,000 miles, new transmission." c. McDonald's spends millions of dollars on an advertising campaign that proclaims: "I'm lovin' it." d. Subway advertises one of its sandwiches by claiming that it contains 6 grams of fat and fewer than 300 calories.

The accompanying table shows the HerfindahlHirschman Index (HHI) for the restaurant, cereal, movie, and laundry detergent industries as well as the advertising expenditures of the top 10 firms in each industry. Use the information in the table to answer the following questions. $$ \begin{array}{l|r|c} \text { Industry } & \text { HHI } & \begin{array}{c} \text { Advertising expenditures } \\\ \text { (millions) } \end{array} \\\ \text { Restaurants } & 179 & \$ 1,784 \\\ \text { Cereal } & 2,098 & 732 \\\ \text { Movie studios } & 918 & 3,324 \\\ \text { Laundry detergent } & 2,068 & 132 \end{array} $$ a. Which market structure-oligopoly or monopolistic competition-best characterizes each of the industries? b. Based on your answer to part a, which type of market structure has higher advertising expenditures? Use the characteristics of each market structure to explain why this relationship might exist.
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