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Which of the following statements about expenditures on advertising is true? a
Which of the following statements about expenditures on advertising is true?
a. When a firm spends a small amount on advertising, this signals that the quality of the good is high.
b. When a firm spends a large amount of money on advertising, advertising can be construed as a signal of quality.
c. If a firm knows its product is of low quality, it will be willing to spend large amounts of money on advertising.
Expert Solution
The correct answer is (b.)
When a firm spends a large amount of money on advertising, advertising can be construed as a signal of quality.
A firm will embrace and undergo the cost of advertising in the market if they know the quality of goods they are offering in the market. The analysis shows that advertisement is a measure of product quality. Through advertising a product, a firm can persuade clients to purchase the product being advertised, and it also helps to improve the firm's image.
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