Calvin Is a Custom Picture Framer

question 126

Multiple Choice

Calvin is a custom picture framer.His total fixed cost is $110 a day,and his average variable cost is $1 a frame.He is maximizing his profit by selling 22 picture frames a day for $6 a frame.Few people know about Calvin's Framery.Calvin thinks that if he spends $10 a day on advertising,he can increase his market and sell 44 picture frames a day for $6 a frame.If Calvin's belief about the effect of advertising is correct,he

• A)cannot increase his economic profit by advertising because advertising increases his average total cost.
• B)cannot increase his economic profit by advertising because advertising increases his total cost.
• C)can increase his economic profit by advertising.
• D)can increase his economic profit by advertising only if he raises the price of a picture frame.
• E)can increase his economic profit by advertising only if he can lower his total variable cost.

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Definitions:

Standard Deviation

Square root of the weighted average of the squares of the deviations of the payoffs associated with each outcome from their expected values.

Over-precision

A cognitive bias causing someone to be too confident in their own judgments and decisions.

Predict Outcomes

The process of forecasting the possible results of a particular situation or decision.

Unrealistic Belief

A conviction or perception not supported by evidence or reality, often overly optimistic or pessimistic about potential outcomes.