Some firms have an incentive to advertise because they sell a:

• A. good with no consumer surplus
• B. differentiated product for which consumers have varying willingness to pay
• C. product with perfectly inelastic demand
• D. homogeneous product in a perfectly competitive market

Answer: (B)

Verified step by step guidance

1. Understand the concept of consumer surplus: it is the difference between what consumers are willing to pay and what they actually pay. If a good has no consumer surplus, it means consumers pay exactly their willingness to pay.
2. Recall that advertising is most effective when firms sell differentiated products, because it helps inform consumers about the unique features and can influence their willingness to pay.
3. Recognize that in a perfectly competitive market with homogeneous products, firms are price takers and have little incentive to advertise since products are identical and consumers have no preference.
4. Consider that products with perfectly inelastic demand mean quantity demanded does not change with price, so advertising would not increase sales volume or profits significantly.
5. Conclude that firms have an incentive to advertise when selling differentiated products for which consumers have varying willingness to pay, as advertising can increase demand or allow charging higher prices.