Question

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 average cost because average fixed cost falls as output increases.
	B) The competing store probably has a lower average variable cost of production.
	C) The competing store probably has a greater number of employees.
	D) The competing store's goal is to maximize revenue and not profit.

Answer 1

Answer

Option A

The competing store probably has a lower average cost because the average fixed cost falls as output increases

The competitor sell 10 units so the average total cost is lower than you so the firm can make a profit because of the lower per-unit fixed cost to cover than you.