If signalling is applied to advertising:
A)a firm with a good product reaps a relatively small benefit from advertising
B)firms recognise the possibility of repeated customers
C)it is irrational 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

Quizplus · Accepted Answer

Signalling in advertising implies that a firm can signal its quality to potential customers through advertising. Therefore, firms with a good product are likely to benefit more from advertising as customers are more likely to become repetitive customers. It is rational for a firm with a good product to pay for the cost of the signal. Hence, option B is correct. Option A is incorrect because signaling through advertising would benefit a firm with a good product. Option C is incorrect because rational firms with good products may consider advertising as an investment in building their brand and signaling their quality to customers. Option D is incorrect because not all firms have the same quality of products and thus, their incentives to advertise could vary.

If Signalling Is Applied to Advertising