Question

Suppose that​ Roots' marginal cost of a jacket is a constant ​$100.00 and the total fixed cost at one of its stores is ​$1 comma 000 a day. This store sells 15 jackets a​ day, which is its​ profit-maximizing number of jackets. Then the stores nearby start to advertise their jackets. The Roots store now spends ​$2 comma 000 a day advertising its​ jackets, and its​ profit-maximizing number of jackets sold jumps to 55 a day. What is this​ store's average total cost of a jacket sold before the advertising begins and after the advertising begins. ​>>> Answer to 2 decimal places. Can you say what happens to the price of a Roots​ jacket, Roots'​ markup, and​ Roots' economy?

Answer 1

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.