Suppose that Benetton Groups marginal cost of a cardigan is a constant 100 and the total fixed

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Suppose that Benetton Group’s marginal cost of a cardigan is a constant €100 and the total fixed cost at one of its stores is €2,000 a day. This store sells 20 cardigans a day, which is its profit maximizing number of cardigans. Then the stores nearby start to advertise their cardigans.

The Benetton store now spends €2,000 a day advertising its cardigans, and its profit-maximizing number of cardigans sold jumps to 50 a day.

a. What is this store’s average total cost of a cardigan sold (i) after the advertising begins and

(ii) before the advertising begins?

b. Can you say what happens to the price of a Benetton cardigan, Benetton’s markup, and Benetton’s economic profit? Why or why not?

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Economics

ISBN: 9781292433639

14th Global Edition

Authors: Michael Parkin

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