Suppose you have just opened a store to sell espresso machines.Both you and a competing store buy this machine from a manufacturer for $130 each.Your competitor ,who has a store of the same size as yours, is currently selling about 10 machines a month at a price of $200 per machine.You expect to sell about 6 machines a month at a price of $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 profitably sell the machine at a lower price although the cost of purchasing the machine is the same for the both of you?
A)The competing store probably has a greater number of employees.
B)The competing store probably has a lower average variable cost of production.
C)The competing store's goal is to maximize revenue and not profit.
D)The competing store probably has a lower average cost because average fixed cost falls as output increases.

Question

Quizplus · Accepted Answer

The competing store may have a lower average cost because as output increases, average fixed cost falls. This means that if your competitor is selling 10 machines a month whereas you are only selling 6, they may have a lower average cost per machine due to economies of scale. This allows them to sell at a lower price and still make a profit. The other options are not relevant to explaining why the competitor can sell at a lower price.

Suppose You Have Just Opened a Store to Sell Espresso