Question

curt makes specialty pizzas. his total fixed cost is $22 a day, and his average variable cost is $2 a pizza. few people know about curt's pizzas and he is maximizing his profit by selling 11 pizzas a day for $4 a pizza. curt thinks that if he spends $20 a day on advertising, he can increase his market and sell 47 pizzas a day for s4 a pizza. if curt's advertising works as he expects, can he increase his economic profit by advertising?

Answer 1

By spending $20 on advertising, Curt can raise his economic profit from $0 to $52 per day, as the increased revenue from selling more pizzas greatly exceeds the additional costs incurred from advertising and higher variable costs.

Step-by-step explanation:

Let's break down Curt's current profits before advertising and then after the proposed advertising costs are considered. Initially, Curt sells 11 pizzas at $4 each, resulting in total revenue (TR) of $44 per day. His total variable cost (TVC) for 11 pizzas is $2 per pizza, which equals $22, and he has a fixed cost (FC) of $22 a day. Thus, Curt's total cost (TC) is $44, and he breaks even with a profit (or economic profit) of $0.

If Curt begins spending $20 a day on advertising, his fixed costs will rise to $42 per day. However, with increased sales of 47 pizzas at $4 each, his total revenue will be $188. The total variable cost for 47 pizzas at $2 each will be $94. Adding the new fixed cost to this, Curt's total cost will now be $136. Subtracting total cost from total revenue, after advertising, Curt's profit will be $188 - $136 = $52 per day.

Indeed, by spending $20 on advertising, Curt can increase his economic profit from $0 to $52 per day, as his revenue has increased significantly while costs (even though they are higher) haven't increased to the same extent.