With today's eight percent inflation, all companies are making decisions in real time about how to price their goods in 2023.Michael Kors is a high-end brand that makes women's handbags that sell between $300 and $500.Herms is an ultra-luxury brand; its Birkin handbags start at $10,000 apiece. The bags are far from identical. The two companies use different grades of leather and the Birkin requires much more detailed stitching by hand.

a) Michael Kors is raising its handbag prices by 5 percent; Herms is raising its prices by 10 percent.There are two possible economic reasons Herms is raising its prices at a faster rate than Michael Kors.Identify them and explain why Herms' price increase is twice as large as Michael Kors' price increase.

b) Both of these handbagcompanieshave earned positive economic profitsoverthe last decade. Based on what you have learned inthiscourse, explain why this has happened.