1)Colgate (the toothpaste company) should spend more on advertising than Coca-Cola, if we consider the advertising expenditures as a percentage of sales. Why, or why not? Data suggests that Coca-Cola's spending on advertisement as a percentage of sales is higher than that of Colgate. What could explain the difference?

2. Provide one argument pro and one against advertising.

3. Describe two different aspects in which a monopolistically competitive firm behaves like a perfectly competitive firm.

4. Evaluate the statement and explain why it is correct or incorrect: "The existence of excess capacity makes a monopolistically competitive firm resemble more a perfectly competitive firm."

1. If we consider that advertising expenditure is directly proportional to the percentage of sales, then Colgate (the toothpaste company) should spend more on advertising than Coca-Cola is an invalid statement. This statement is true in the case of products that are identical to each other. Colgate and Coca-Cola are not identical to each other. Therefore, the statement is invalid.

According to the statement, Colgate spends a lesser proportion of its sale on advertising than Coca-Cola as Colgate is an essential product, whereas Coca-Cola is a luxury product. Luxury products need a considerable amount to be spent on advertisement to attract consumers. Therefore, the luxury product Coca-Cola spends more proportion of sale on advertising than the necessary product Colgate.

2. One argument in favor of advertising is that it provides knowledge about the product to the consumers. Advertisement highlights the distinct features, the uniqueness about the product and current attractive offers. With the help of an advertisement, the company builds its image in the minds of consumers.

One argument against advertising is that it confuses the consumer. The consumer can get confused about the product by seeing various advertisements. At a later stage, the consumer stops paying attention towards the advertisement due to which huge amount spent by the companies on advertisement gets wasted.

3. Monopolistic competition and perfectly competitive firm behave similar to each other in the two cases given below:

• Profit maximization of both the firms is at the point where marginal revenue is equal to the marginal cost.
• In the long run, both types of firms earn normal profit only.

4. The given statement is false.

Level of output produced by perfect competitors, in the long run, is the point where marginal cost is equal to long-run average cost. Under perfect competition, the firm fully utilizes the capacity in the long-run. This means that there exists no excess capacity. Level of output produced by perfect competitors, in the long run, is the point where marginal cost is equal to long-run average cost. Under perfect competition, the firm fully utilizes the capacity in the long-run. This means that there exists no excess capacity. Under monopolistic competition, the firm does not produce output equal to the minimum point of the long run average cost curve. This states that the firm does not fully utilize its capacity. The capacity not utilized is known as 'excess capacity.' Therefore, the existence of excess capacity does not make a monopolistic firm resemble more a perfectly competitive firm as there exists no excess capacity in perfect competition.