Suppose You Have Just Opened a Store to Sell Espresso

question 74

Multiple Choice

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 incur 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 lower marginal cost of production.
• B)The competing store probably has a lower average variable cost of production.
• C)The competing store's goal is to maximise revenue and not profit.
• D)The competing store probably has a lower average cost because average fixed cost falls as output increases.

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Definitions:

Owners' Claims

The financial interest or claims that business owners have in the assets of their company, often calculated as equity.

Assets

Economic resources owned or controlled by a business or individual, expected to produce value or benefit in the future.

Investing Activities

Financial actions related to acquiring or disposing of long-term assets and other investments.

Long-term Borrowing

Debt obligations or loans that are due to be repaid over a period longer than one year, often used for large capital investments.