Market Allocation - What effect does advertising have on...

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–What effect does advertising have on market allocation? Can you represent, using supply and demand, situations in which advertising has positive effects? Negative effects? Advertising gives information about a products’ value and can help determine its “true” demand curve, competitive equilibrium, and efficient outcome for society –What can we say about the expected value of buying insurance for most people? What does it imply about people if they insure against small losses? * If assume insurance companies want to make profits, then the expected value for consumers must be negative. This implies that most people are risk adverse b/c there is the possibility for a big loss Is it sensible to assume that firms maximize profits? Provide reasons for and against this assumption? Yes because economists assume firms want to maximize economic profits (difference between total revenue and total costs, implicit and explicit).
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