Suppose that at one of the Talbot's shops, marginal cost of a coat is constant at $150, and total fixed cost is $3,000 a day. The shop maximizes its profit by selling 15 coats a day at $500 per coat. Then the shops nearby increase their advertising. The Talbot shop responds by spending $1,500 a day more on advertising its coats. As a result, its profit-maximizing number of coats sold increases to 25 a day at $400 per coat.
-In the scenario above, as a result of increased advertising, Talbot's average total cost

Question

Quizplus · Accepted Answer

As a result of increased advertising, Talbot's average total cost falls by $20 per coat. This is because the increase in advertising spending leads to an increase in the number of coats sold, which spreads the fixed costs over a larger number of units.

Suppose That at One of the Talbot's Shops, Marginal Cost