Stella sets up a online busineess to sell Butterfly cakes. The total fixed cost is $1000 a day and the average variable cost is $100 for a cake. Each cake is sold at the price of $300 and five cakes can be sold every day. Here are some comments from her customers. "The Butterfly Cake is a perfect birthday gift to my friend's little girl. She loved the cake very much, in particular the wings decorated with colored marshmallows." "The cakes were amazing and tasted delicious! Strongly recommended!" "The classy cake packaging is well matched with the refined taste. Great value for the choice." "Tried Buttefly few times and just yesterday ordered a tailored made one for my niece's birthday. Very looking forward to it!" Despite of many positive comments from customers, the sales remain stagnant. Stella decides to spend $1500 a day on internet advertising and expects to increase her sales to 20 cakes a day. She keeps the selling price of $300 for a cake.

 a. (3 marks) Explain how Stella differentiates its product to compete with other cake shops. 

b. (8 marks) Use the given information to show the change of the economic profit before and after online advertising. Will you suggest Stella to advertise? 

c. (8 marks) Continuing from your answer to (b), will you suggest to sell the Butterfly cake at the same price to maximize the profit in the short run and long run? Explain your answer. 

d. (6 marks) Now, if all firms advertise their cakes.  How will Stella's demand curve and MR curve be affected?  What advises will you offer to Stella on her estimated quantity sold (20 cakes) and price ($300) after advertising?

Answer rating: 100% (QA)

a Product Differentiation Stella differentiates its Butterfly cakes through several aspects as highlighted by customer comments Design and Decoration The cakes have unique and visually appealing desig... View the full answer