Tina bakes delicious cookies. The total fixed cost is $40 a day, and her average variable cost is $1 a bag. Few people know about Tina’s Cookies, and she is maximizing her profit by selling 10 bags a day for $5 a bag. Tina thinks that if she spends $50 a day on advertising, she can increase her market share and sell 25 bags a day for $5 a bag.
a. If Tina’s advertising works as she experts, can she increase her economic profit by advertising?
b. If Tina advertises, will her average total cost increase or decrease at the quantity produced?
c. If Tina advertises, will she continue to sell her cookies for $5 a bag or will she change her price?