Advertising can reduce efficiency by:

• A. improving the allocation of resources in perfectly competitive markets
• B. lowering barriers to entry for new firms
• C. increasing consumer awareness of all available products
• D. creating artificial product differentiation that leads to higher prices

Answer: (D)

Verified step by step guidance

1. Understand the role of advertising in microeconomics: Advertising can influence consumer preferences and market outcomes by providing information or by differentiating products.
2. Recognize that in perfectly competitive markets, products are homogeneous and advertising typically does not improve resource allocation because consumers already have full information and products are identical.
3. Consider how advertising can create artificial product differentiation, making similar products appear different to consumers, which can reduce competition and allow firms to charge higher prices.
4. Analyze how this artificial differentiation can lead to inefficiencies by reducing consumer surplus and causing resources to be allocated based on perceived differences rather than actual quality or cost differences.
5. Conclude that the main inefficiency caused by advertising in this context is the creation of artificial product differentiation that leads to higher prices, rather than improving market efficiency or lowering barriers to entry.