Use the Information Below to Answer the Following Questions

question 40

Multiple Choice

Use the information below to answer the following questions.
Fact 14.3.2
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 14.3.2. Having a brand name helps Tommy Hilfiger increase its economic profit because

• A)the goal of a brand name is to encourage people to buy just one good. After the initial purchases, Tommy Hilfiger can decrease quality and produce goods at a lower average total cost, which increases economic profit.
• B)in every type of market, consumers are most comfortable when buying from a firm with a well-known brand name. And the greater the number of consumers, the greater is the economic profit.
• C)a brand name provides an incentive to achieve high and consistent quality, and consumers will purchase goods from Tommy Hilfiger rather than from an unknown producer because they know what to expect from Tommy Hilfiger.
• D)having a brand name usually leads to a monopoly.
• E)none of the above

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Definitions:

Absorption Costing

A bookkeeping approach that incorporates all production expenses—direct materials, direct labor, and both variable and fixed overhead—into the product's cost.

Net Operating Income

The profit generated from normal business operations, excluding extraordinary items and expenses like taxes.

Variable Costing

A pricing approach that incorporates just the variable production expenses—such as direct materials, direct labor, and variable manufacturing overhead—into the unit cost of a product.

Fixed Manufacturing Overhead

These are the manufacturing costs that do not change with the level of production, such as rent, salaries, and insurance.