1. Advertising for eyeglasses _________ (increases/decreases) the price of eyeglasses because advertising promotes _________.

2. An advertisement that succeeds in getting consumers to try the product will be sensible only if the number of _________ customers is large.

3. In Table, the profit from repeat customers will equal the cost of the advertisement if there are_________ repeat customers.

4. An expensive advertising campaign for a movie sends the signal that the movie will generate enough _________ to _________.

5. Movie-Buzz Numbers. Consider a theater that earns a profit of $2 per movie ticket sold. An advertisement that costs $3,400 would have the direct effect of getting 1,000 people to buy tickets. To make the advertisement worthwhile, how many of the original ticket buyers must each persuade just one other person to buy a ticket?

6. The Cost of Celebrities. Consider a firm that hires an expensive celebrity to advertise its products. Does the firm have an incentive to prevent its customers from discovering how much it pays the celebrity?

7. Word-of-Mouth Book Sales. Consider a publisher who earns a profit of $2 per book sold. An advertisement that costs $320,000 would sell 100,000 books directly. To make the advertisement worthwhile, how many of the original buyers must each persuade just one other person to buy the book?

Transcribed Image Text:

AD VERTISING PROFITABILITY AND SIGNALING Number of Repeat Customers Number of Consumers Who Try the Product Profit per Repeat Profit from Repeat Customers Cost of Advertisement Product Customer Energy bar A Energy bar B $10 million 10 million 10 million 10 million 5 million 1 million $20 million 4 million $4