Suppose you have just opened a store to sell espresso machines. Both you and a competing store buy this machine from a manufacturer for US$130 each. Your competitor, who has a store the same size as yours, is currently selling about 10 machines a month at a price of US$200 per machine. You expect to sell about six machines a month at a price of US$220 per machine. If you lower your price, you expect to make a loss. Which of the following could explain why your competitor is able to sell the machine at a lower price profitably although the cost of purchasing the machine is the same for the both of you?
A) The competing store's goal is to maximize revenue and not profit.
B) The competing store probably has a lower average cost because average fixed costs falls as output increases.
C) The competing store probably has a lower average variable cost of production.
D) The competing store probably has a lower marginal cost of production.

Question

Quizplus · Accepted Answer

The competing store selling more units (10 machines per month) compared to your store (6 machines per month) means their average fixed costs are spread over more units, thus lowering their average cost per unit. This allows them to profitably sell at a lower price. Options A, C, and D do not directly address the ability to sell at a lower price given the same purchase cost and do not account for the difference in volume sold.

Suppose You Have Just Opened a Store to Sell Espresso