Which statement about the relationship of advertising to sales and profits is most likely true?

• A. Advertising can increase consumer willingness to pay, leading to higher sales and potentially greater profits.
• B. Advertising always decreases consumer surplus by reducing the price consumers are willing to pay.
• C. Advertising has no effect on sales or profits because consumer preferences are fixed.
• D. Advertising only increases profits if it reduces production costs.

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the role of advertising in microeconomics. Advertising can influence consumer preferences by increasing awareness or changing perceptions, which can affect the demand curve for a product.
2. Step 2: Recognize that advertising can increase consumer willingness to pay by making the product more desirable or differentiating it from competitors, effectively shifting the demand curve to the right.
3. Step 3: Analyze how an increase in willingness to pay and demand can lead to higher sales volume and potentially allow the firm to charge a higher price, increasing total revenue.
4. Step 4: Consider the cost side: advertising incurs costs, so for profits to increase, the additional revenue generated by advertising must exceed these costs.
5. Step 5: Evaluate the incorrect statements by understanding that advertising does not always reduce consumer surplus by lowering willingness to pay, nor is it true that consumer preferences are fixed or that advertising only affects profits through production cost reductions.