Calvin is a custom picture framer.His total fixed cost is $110 a day,and his average variable cost is $1 a frame.He is maximizing his profit by selling 22 picture frames a day for $6 a frame.Few people know about Calvin's Framery.Calvin thinks that if he spends $10 a day on advertising,he can increase his market and sell 44 picture frames a day for $6 a frame.If Calvin's belief about the effect of advertising is correct,he

Question

Quizplus · Accepted Answer

By spending $10 a day on advertising, Calvin can sell 22 more frames at the same $6 per frame price. This will increase his revenue by $132 ($6 per frame x 22 frames), and since his variable cost per frame is $1, his total variable cost for 44 frames will be $44 ($1 per frame x 44 frames). Therefore, his total cost will be $110 (fixed cost) + $44 (variable cost) + $10 (advertising cost) = $164. His total revenue will be $264 ($6 per frame x 44 frames). Thus, his profit will be $100 ($264 - $164), which is greater than his profit of $72 ($6 per frame x 22 frames - $110 total cost) without advertising. Therefore, Calvin can increase his economic profit by advertising.

Calvin Is a Custom Picture Framer