Use the Information Below to Answer the Following Questions

question 124

Multiple Choice

Use the information below to answer the following questions.
Fact 13.3.2
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 13.3.2.Tommy Hilfiger uses advertising as a signal because

• A)when Tommy Hilfiger advertises,it forces its competitors to advertise,which raises the competition's average total cost and increases the possibility of the competition incurring an economic loss and leaving the market.
• B)only firms that can afford advertising have longevity and will be able to honour any future obligations to its customers.
• C)by spending large sums of advertising Tommy Hilfiger is signalling that its jackets are high quality.
• D)advertising encourages people to spend regardless of the quality.
• E)advertising always increases demand and creates a more efficient market.

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Definitions:

Producers Gain

The increase in total revenue that producers achieve from selling goods or services, typically measured against costs.

Price Elasticity of Demand

Measures how much the quantity demanded of a good responds to a change in the price of that good.

Short-Run Elasticity

Measures the responsiveness of demand or supply to price changes over a short period.

Equilibrium Price

The point in the market where the volume of goods available equals the volume of goods sought by buyers.