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Homework answers / question archive / Suppose that Roots' marginal cost of a jacket is a constant $100, and the total fixed costs at one of its stores is $2,000 a day
Suppose that Roots' marginal cost of a jacket is a constant $100, and the total fixed costs at one of its stores is $2,000 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 $2,000 a day, advertising its jackets, and its profit-maximizing number of jackets sold, jumps to 45 a day. What is this store's average total cost, of a jacket sold, before the advertising begins, and after the advertising begins?
Average total cost:
Before advertising: $233.33 per jacket
After advertising: $188.89 per jacket
With the store selling 15 jackets per day, its total costs are its fixed costs + its variable costs. We know:
With 15 jackets sold each day, variable costs are $1,500 (15 jackets x $100 per jacket). Adding in fixed costs, the store incurs total costs of $3,500 per day. If we allocate these total costs to the product line, we get an average cost of $3,500 / 15 = $233.33 per jacket.
The addition of the advertising increases costs and jacket sales. Now we know:
Total store costs are now $8,500 per day. If we allocate these costs over the 45 jackets, we get an average unit cost of $188,89 per jacket.
