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 after the advertising begins?

Question

Quizplus · Accepted Answer

The average total cost (ATC) is calculated by adding total fixed costs, total variable costs, and advertising costs, then dividing by the number of customers. After advertising, ATC = ($20,000 + $12,000 + $5,000) / 12,000 = $3.08.

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