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