Question

Description After coming up with an innovative idea for a new product, you paid $2000 to an industrial designer to draw the blueprints and found a factory in China that agreed to produce the product for you for $3.5 per unit (the price includes the shipping cost from China to you). Since this is a totally new and unique product, you have no idea how the demand for it would be. Therefore, before you start pricing the product and ordering large amounts from the Chinese factory, you decide to run an experiment (or a pilot study): you talk to Target and they allow you to sell your product at 11 different Target stores for 11 different prices (a different price at each store). These stores are located in areas whose residents have similar average income, so you can be certain that price (and not income) is the only factor varying among these stores. After 2 weeks, Target sends you the sale numbers for your product.

1. Given the information in the description part, how much are the total fixed cost and the marginal cost of production?

Answer 1

Answer

The Total fixed Cost of production = $2000

Reason: It is the amount paid to the industrial designer to draw blueprints. It does not change withe the level of production.

The Marginal Cost = $3.5 per unit

Reason: It is the cost of producing an additional unit of the product