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 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 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 is able to sell at a lower price and still make a profit because of the economies of scale that come with selling more machines. As the competing store sells more machines, its fixed cost is spread over a larger number of units, resulting in a lower average cost per unit. This is reflected in the lower selling price they are able to offer.

Suppose You Have Just Opened a Store to Sell Espresso