Suppose that Tommy Hilfigers marginal cost of a jacket is a constant $100 and the total fixed
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Suppose that Tommy Hilfiger’s marginal cost of a jacket is a constant $100 and the total fixed cost at one of its stores is $2,000 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 Tommy Hilfiger store now spends $2,000 a day advertising its jackets, and its profit-maximizing number of jackets sold jumps to 50 a day.
a. What is this store’s average total cost of a jacket sold (i) before the advertising begins and (ii) after the advertising begins?
b. Can you say what happens to the price of a Tommy Hilfiger jacket, Tommy’s markup, and Tommy’s economic profit? Why or why not?
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