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Fact 14.3.2
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.14.3.2. 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 ________. If price falls, markup ________. If price rises, markup ________.

Question

Quizplus · Accepted Answer

- If advertising decreases demand and makes demand more elastic, the price of a Tommy Hilfiger jacket falls. In the given scenario, with the increase in advertising, the profit-maximizing quantity of jackets sold has increased from 20 to 50, which indicates that demand has become less elastic.
- If advertising increases demand and makes demand less elastic, the price of a Tommy Hilfiger jacket rises. This is opposite of what would happen if demand became more elastic.
- If the price falls, markup falls. This is because markup is calculated as (Price - Marginal Cost) / Price, so as the price falls, the markup also falls.
- If the price rises, markup rises. This is because the difference between price and marginal cost is larger, so the markup increases.

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