Use the Information Below to Answer the Following Questions

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. 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.

Correct Answer:

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