6a . The role of brand names and advertising Which of the following statements about expenditures on advertising is true? O When a firm spends a small amount of money on advertising, this signals that the quality of the good is high. O When a firm spends a large amount of money on advertising, advertising can be construed as a signal of quality. O If a firm knows its product is of low quality, it will be willing to spend large amounts of money on advertising. Read the following example and determine whether it illustrates a common critique or defense of advertising. Theo sees a commercial for Athena clothing company that depicts the wearers of the clothes out having a good time with friends. Although he doesn't particular need new clothes, the commercial prompts him to buy an Athens t-shirt. defense critique This illustrates a common of advertising.6b . Profit maximization and loss minimization Lagatt Green is a monopoly beer producer and distributor operating in the hypothetical economy of Lightington. Assume that Lagatt Green is not able price discriminate, and so it sells its beer to all customers at the same price per bottle. The following graph gives the marginal cost (MC), marginal revenue (MR), average total cost (ATC), and demand (D) curves that Lagatt Green faces for beer in Lightington. Place the black point (plus symbol) on the graph to indicate the profit-maximizing price and quantity for Lagatt Green. If Lagatt Green is making a profit, use the green rectangle (triangle symbols) to shade in the area representing its profit. On the other hand, if Lagatt Green is suffering a loss, use the purple rectangle (diamond symbols) to shade in the area representing its loss. 4.00 3.50 Monopoly Outcome 3.00 2.50 Profit ATC PRICE (Dollars per bottle) 2.00 1.50 Loss 1.00 MC 0.50 D MR 0 0.5 1.0 1.5 2.0 25 3.0 3.5 4.0 QUANTITY (Thousands of bottles of beer) Suppose Lagatt Green charges $2.00 per bottle. Your study partner Adrian says that because Lagatt Green is a monopoly with market power, it should charge the higher price of $2.25 per bottle in order to increase its profit.Complete the following table to determine whether Adrian is correct. Price Quantity Demanded Total Revenue Total Cost Profit (Dollars per bottle) (Cans) (Dollars) (Dollars) (Dollars) 2.00 2.25 Given the earlier information, Adrian correct in his assertion that Lagatt Green should charge $2.25 per bottle. Suppose that a technological innovation decreases Lagatt Green's costs so that it now faces the marginal cost (MC) and average total cost (ATC) given on the following graph. Specifically, the technological innovation causes a decrease in average fixed costs, thereby lowering the ATC curve and moving the MC curve. Place the black point (plus symbol) on the following graph to indicate the profit-maximizing price and quantity for Lagatt Green. If Lagatt Green is making a profit, use the green rectangle (triangle symbols) to shade in the area representing its profit. On the other hand, if Lagatt Green is suffering a loss, use the purple rectangle (diamond symbols) to shade in the area representing the loss. 4.00 3.50 Monopoly Outcome 3.00 2.50 Profit PRICE (Dollars per unit) 200 1.50 Loss ATC 1.00 0.50 MC MR D 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 QUANTITY (Thousands of bottles of beer)