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Fact 13.3.3
Suppose that Roots' marginal cost of a jacket is a constant $125.00 and the total fixed cost at one of its stores is $1,500 a day.This store sells 20 jackets a day,which is its profit-maximizing number of jackets.Then the stores nearby start to advertise their jackets.The Roots store now spends $2,000 a day advertising its jackets,and its profit-maximizing number of jackets sold jumps to 70 a day.
-Refer to Fact 13.3.3.If the nearby firms' advertising decreases the demand for Roots' jackets and makes the demand more elastic,the price of a Roots' jacket ________.If Roots' advertising increases the demand for Roots' jackets and makes the demand less elastic,the price of a Roots' jacket ________.

Question

Quizplus · Accepted Answer

When nearby firms advertise their jackets and decrease demand for Roots' jackets, demand becomes more elastic. This means that a small increase in price would lead to a large decrease in quantity demanded. Therefore, the price of a Roots' jacket falls.

When Roots' advertising increases demand for their jackets and makes demand less elastic, a small increase in price would lead to a small decrease in quantity demanded. Therefore, the price of a Roots' jacket rises.

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