Suppose that Tommy Hilfiger\'s marginal cost of a jacket is a constant $125.00 a

ID: 1223737 • Letter: S

Question

Suppose that Tommy Hilfiger's marginal cost of a jacket is a constant $125.00 and the total fixed cost at one of its stores is $2,000 a day.

This store sells 20 jackets a day, which is its profit-maximizing number of jackets.

Then the stores nearby start to advertise their jackets. The Tommy Hilfiger store now spends

$1, 000 a day advertising its jackets, and its profit-maximizing number of jackets sold jumps to

50 a day.

Calculate the store's average total cost of a jacket sold before the advertising begins and after the advertising begins.

Before the advertising begins, the average total cost of a jacket sold in this store is ____

After the advertising begins, the average total cost of a jacket sold in this store is _______

Before Advertising begins:

Marginal Cost of a jacket = $ 125

Total Fixed Cost = $ 2,000 a day

Quantity sold = 20 jackets a day

Total Cost = (Marginal Cost * Quantity Sold) + Total Fixed Cost = ($ 125 * 20) + $ 2,000 = $ 2,500 + $ 2,000 = $ 4,500

Average Total Cost = Total Cost/Quantity Sold = 4500/20 = $ 225 per jacket

After Advertising begins:

Marginal Cost of a jacket = $ 125

Total Fixed Cost = $ 2,000 a day + $ 1,000 a day = $ 3,000 a day

Quantity sold = 50 jackets a day

Total Cost = (Marginal Cost * Quantity Sold) + Total Fixed Cost = ($ 125 * 50) + $ 3,000 = $ 6,250 + $ 3,000 = $ 9,250

Average Total Cost = Total Cost/Quantity Sold = 9250/50 = $ 185 per jacket

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