Question

1. I have attempted to purchase a refrigerator from a local company. The relevant costs are as follows:
   1. Asking price at local business was $2,000
   2. The cost of the same appliance at the local Home Depot was $1,600
   3. For the local business, the total average cost associated with that refrigerator is $1,900
   4. The costs solely associated with the individual refrigerator is $1,700
   5. My offer to the business owner was to purchase the refrigerator at $1,800

In terms of being economically rational, should she have accepted my offer or declined my offer? Explain your answer.

Answer 1

Yes, the business owner should agree to sell the refrigerator at the price of $ 1800.

Explanation:

Here, even though she is not able to recover the entire average cost associated with the refrigerator, she is still able to recover the average variable cost associated with that unit, which is $ 1700. So, in the short run, even if she is making loss, she is still making enough to recover the variable costs. In the long, run, this means, that some shops will exit the market. This implies, there will be a reduction in market supply, which will drive up the prices in the long run, until this particular shop owner reaches the break even point and starts earning normal profit.