Question: Suppose that Roots' 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 Roots 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 Roots jacket, Roots' markup, and Roots' economic profit? Why or why not?