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Fact 13.3.2
Suppose that Tommy Hilfiger's marginal cost of a jacket is $100 (a constant marginal cost)and at one of the firm's shops,total fixed cost is $2,000 a day.The profit-maximizing number of jackets sold in this shop is 20 a day.Then the shops nearby start to advertise their jackets.The Tommy Hilfiger shop now spends $2,000 a day advertising its jackets,and its profit-maximizing number of jackets sold jumps to 50 a day.
-Refer to Fact.13.3.2.If advertising decreases demand and makes demand more elastic,the price of a Tommy Hilfiger jacket ________.If advertising increases demand and makes demand less elastic,the price of a Tommy Hilfiger jacket ________.

Question

Quizplus · Accepted Answer

When advertising decreases demand and makes demand more elastic, the price of a product falls. This is because consumers become more sensitive to price changes and the firm needs to reduce the price to maintain sales. On the other hand, when advertising increases demand and makes demand less elastic, the price of a product rises. This is because the firm has increased market power and can charge higher prices without losing as many customers. In the given scenario, advertising increased demand and made it less elastic, therefore the price of a Tommy Hilfiger jacket would rise.

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