Answer:
What is this store's average total cost of a jacket sold before the advertising begins and after the advertising begins.
before advertising costs increase:
marginal cost is constant, so we can state that the total variable costs are $100 per jacket
total fixed costs = $1,000 per day / 15 jackets = $66.67 per jacket
average total cost per jacket before increasing advertising expense = $100 + $66.67 =) $166.67
after advertising costs increase:
total variable costs are $100 per jacket
total fixed costs = $2,000 per day / 55 jackets = $36.36 per jacket
average total cost per jacket after increasing advertising expense = $100 + $36.36 =) $136.36
Can you say what happens to the price of a Roots jacket, Roots' markup, and Roots' economy?
Roots is experiencing economies of scale since average total cost per jacket decreased as the total number of jackets sold increased. But in order to sell that new amount of jackets, their price probably decreased. If the price hadn't changed, then the profit maximizing number of jackets sold per day would be close to 30, but it clearly isn't. That means that the company's markup decreased, but the company is now better off since it is maximizing its profits even though its expenses increased and the markup decreased.
