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Fact 14.3.3
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 14.3.3. 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

If the nearby firms' advertising decreases the demand for Roots' jackets and makes the demand more elastic, Roots' will face a more competitive market, and it will have to lower the price of its jackets to sell 70 jackets a day. Therefore, the price of a Roots' jacket falls. 
On the other hand, if Roots' advertising increases the demand for Roots' jackets and makes the demand less elastic, Roots' will have the market power to charge a higher price for its jackets as it is selling more and earning higher profits. Therefore, the price of a Roots' jacket rises.

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