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 incur 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 lower marginal cost of production.
B)The competing store probably has a lower average variable cost of production.
C)The competing store's goal is to maximise 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 is selling more machines (10 vs. 6) which means they are able to spread their fixed costs (such as rent and utilities) over a larger number of units sold. This would lower their average fixed cost and therefore, their overall average cost.

Suppose You Have Just Opened a Store to Sell Espresso