The Karaoke Channel Online streams professional-grade karaoke for $9.95 a month. Suppose Karaoke Channel Online has a constant marginal cost of $1 per customer and total fixed cost is $20,000. The profit maximizing number of customers is 10,000. Several competitors start to advertise online. Karaoke Channel Online now spends $5,000 a month on advertising and the profit maximizing number of customers increases to 12,000. What is Karaoke Channel Online's average total cost before the advertising begins?

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Quizplus · Accepted Answer

Before advertising, the average total cost is calculated as (Total Fixed Cost + Total Variable Cost) / Number of Customers. Total Variable Cost is $1 per customer, so for 10,000 customers, it's $10,000. Total cost is $20,000 (fixed) + $10,000 (variable) = $30,000. Average total cost is $30,000 / 10,000 = $3.

The Karaoke Channel Online Streams Professional-Grade Karaoke for $9