Consider a copy shop with annualized fixed costs of $1000 and variable cost of $0.03 per page. The shop presently has orders for 100,000 copies at a price of $0.05 per page. A new customer approach the shop with an order of 10,000 copies, but will pay only $0.035 per page.
(a) What is the shop’s average cost (AC) without taking the new order? Is it less than the product price?
(b) What is the shop’s average cost (AC) if it does take this order? Is it less than or greater than the price for the new order? Should this be the criteria for deciding whether to take the new order?
(c) If not, what is the appropriate criterion for taking the order? Explain.