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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 of money on advertising , this signals that the quality of the good is high.
B. If a firm knows its product is of low quality, it will be willing to spend large amounts of money on advertising.
C. When a firm spends a large amount of money on advertising, advertising can be construed as a signal of quality.
Expert Solution
Expenditure on advertising refers to an expense which is done by an organization in order to promote his or her business, product or services. Advertising of a product which is established refers to a signal of quantity, but it is a signal which is imperfect that leaves the uncertainty which influences the repurchase decision of the consumers. Thus, when an organization spends a large sum on the advertisement, it may be construed as a signal of quality. (Correct answer: C)
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