Suppose that Benetton Groups marginal cost of a cardigan is a constant 100 and the total fixed
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Suppose that Benetton Group’s marginal cost of a cardigan is a constant €100 and the total fixed cost at one of its stores is €2,000 a day. This store sells 20 cardigans a day, which is its profit maximizing number of cardigans. Then the stores nearby start to advertise their cardigans.
The Benetton store now spends €2,000 a day advertising its cardigans, and its profit-maximizing number of cardigans sold jumps to 50 a day.
a. What is this store’s average total cost of a cardigan sold (i) after the advertising begins and
(ii) before the advertising begins?
b. Can you say what happens to the price of a Benetton cardigan, Benetton’s markup, and Benetton’s economic profit? Why or why not?
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