Which of the following best describes the role advertising can play with respect to differentiated products?

• A. Advertising helps firms highlight unique features, increasing consumer awareness and perceived differences among products.
• B. Advertising only increases production costs without affecting consumer perceptions.
• C. Advertising reduces market competition by discouraging entry of new firms.
• D. Advertising eliminates product differentiation by making all products appear identical.

Answer: (A)

Verified step by step guidance

1. Understand the concept of product differentiation: Differentiated products are those that are perceived by consumers as distinct from one another due to unique features, quality, branding, or other attributes.
2. Recognize the role of advertising in microeconomics: Advertising is a tool firms use to communicate information about their products to consumers, which can influence consumer preferences and perceptions.
3. Analyze how advertising affects consumer awareness: Advertising can highlight the unique features of a product, making consumers more aware of differences between competing products.
4. Consider the impact of advertising on perceived product differences: By emphasizing unique attributes, advertising can increase the perceived differentiation among products, which can affect demand and pricing power.
5. Evaluate alternative statements: Advertising does not just increase costs without benefits, nor does it necessarily reduce competition or eliminate differentiation; instead, it often enhances product differentiation and consumer choice.