Bianca bakes delicious cookies. Her total fixed cost is $40 a day, and her average variable cost
Question:
Bianca bakes delicious cookies. Her total fixed cost is $40 a day, and her average variable cost is $1 a bag. Few people know about Bianca’s Cookies, and she maximizes her profit by selling 10 bags a day for $5 a bag. Bianca thinks that if she spends $50 a day on advertising, she will sell 25 bags a day for $5 a bag.
1. If Bianca’s belief about the effect of advertising is correct, can she increase her economic profit by advertising?
2. If Bianca advertises, will her average total cost increase or decrease at the quantity produced?
3. If Bianca advertises, will she continue to sell her cookies for $5 a bag or will she raise her price or lower her price?
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Step by Step Answer:
1 With no advertising Biancas total revenue is 50 10 bags at 5 a bag and her total cost is 50 40 total fixed cost plus 10 total variable cost Biancas economic profit is zero With 50 a day advertising expenditure total revenue is 125 25 bags at 5 a bag and total cost is 115 90 total fixed cost plus 25 total variable cost Biancas economic profit with no price change is 10 a day so Bianca can increase her economic profit by advertising 2 If Bianca advertises her average total cost will decrease With no advertising her average total cost is 5 ...View the full answer
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