suppose that at one of the talbots shops, marginal cost of a coat is constant at $150, and total fixed cost…

suppose that at one of the talbots shops, marginal cost of a coat is constant at $150, and total fixed cost is $3,000 a day. the shop maximizes its profit by selling 15 coats a day at $500 per coat. then the shops nearby increase their advertising. the talbot shop responds by spending $1,500 a day more on advertising its coats. as a result, its profit - maximizing number of coats sold increases to 25 a day at $400 per coat. in the scenario above, as a result of increased advertising, talbots average total cost rises by $50 per coat. falls by $20 per coat. falls by $40 per coat. rises by $30 per coat.

suppose that at one of the talbots shops, marginal cost of a coat is constant at $150, and total fixed cost is $3,000 a day. the shop maximizes its profit by selling 15 coats a day at $500 per coat. then the shops nearby increase their advertising. the talbot shop responds by spending $1,500 a day more on advertising its coats. as a result, its profit - maximizing number of coats sold increases to 25 a day at $400 per coat. in the scenario above, as a result of increased advertising, talbots average total cost rises by $50 per coat. falls by $20 per coat. falls by $40 per coat. rises by $30 per coat.

Answer

Explanation:

Step1: Calculate average total cost before advertising

Total cost (TC_1 = TFC_1+TVC_1). Since (MC = 150) (constant), (TVC_1=MC\times Q_1 = 150\times15=2250), (TFC_1 = 3000). So (TC_1=3000 + 2250=5250). Average total cost (ATC_1=\frac{TC_1}{Q_1}=\frac{5250}{15}=350)

Step2: Calculate average total cost after advertising

New (TFC_2=TFC_1 + 1500=3000+1500 = 4500), (TVC_2=MC\times Q_2=150\times25 = 3750). So (TC_2=4500+3750 = 8250). Average total cost (ATC_2=\frac{TC_2}{Q_2}=\frac{8250}{25}=330)

Step3: Calculate the change in average total cost

(\Delta ATC=ATC_2 - ATC_1=330 - 350=- 20)

Answer:

falls by $20 per coat.