If signalling is applied to advertising:
A) a firm with a good product reaps a relatively small benefit from advertising
B) firms ignore the possibility of repeated customers
C) it is rational for a firm with a good product to pay for the cost of the signal
D) all firms have the same incentive to advertise

Question

If signalling is applied to advertising:
A) a firm with a good product reaps a relatively small benefit from advertising 
B) firms ignore the possibility of repeated customers
C) it is rational for a firm with a good product to pay for the cost of the signal 
D) all firms have the same incentive to advertise

Quizplus · Accepted Answer

Signalling theory suggests that advertising can serve as a signal for the quality of a firm's product. If a firm has a good product, it may be rational for them to pay for the cost of the signal (advertising) in order to communicate this quality to consumers. Therefore, a firm with a good product can benefit from advertising through signalling.

If Signalling Is Applied to Advertising