Question 1
The similarity of the physical attributes of substitutes or the closeness in their ability to satisfy human want is a major determinant of elasticity of demand. A successful advertisement manages to convince consumers that the advertizing firm’s product is the best when compared to substitutes. This will make consumers avoid substitutes and buy the firm’s products even when their prices increase. Advertisements therefore reduce responsiveness of demand to changes in price level.
Monopolistically-competitive market is a market where an individual firm has control over the supply of a particular good or service which does not have close substitutes. Since in a monopolistically-competitive industry there are no close substitutes, advertisements do not have any effect on elasticity of demand both in the short run and long run. However, it increases the quantity demanded in the long run.
Question 2
Minimum wage will improve the cost of living of low income households .It will stimulate production by increasing the buying power of low income earners therefore increasing revenues for firms. On the other hand, minimum wage will cause unemployment because the higher wages will attract more workers in the labor market whereas the lower wages will reduce demand for labor. It will also cause inflation when firms increase prices of goods to compensate for the increased cost of production.
Question 3
Presence of labor unions will not affect resource market in monopolistically-competitive market. Firms in such markets face an inelastic demand curve; they can therefore increase prices without affecting demand. When labor unions agitate for higher wages, the resultant increase in production cost can be fully transferred to consumers therefore the quantity of labor demanded will be unaffected.
