How does advertising typically impact monopolistically competitive firms?

• A. It helps differentiate their products and can increase demand.
• B. It eliminates all competition, leading to a pure monopoly.
• C. It reduces their costs by standardizing production.
• D. It has no effect on consumer preferences or market share.

Answer: (A)

Verified step by step guidance

1. Understand the nature of monopolistic competition: firms sell products that are similar but differentiated, meaning each firm tries to make its product stand out from others.
2. Recognize that advertising is a tool firms use to highlight the unique features or qualities of their products, which helps in product differentiation.
3. Analyze how product differentiation through advertising affects demand: it can make consumers perceive the product as more desirable or distinct, potentially increasing the firm's demand curve.
4. Consider the impact on competition: advertising does not eliminate competition but rather intensifies it by encouraging firms to compete on product characteristics rather than just price.
5. Conclude that advertising in monopolistic competition typically increases demand by differentiating products, rather than eliminating competition, reducing costs, or having no effect on consumer preferences.