Assume that a manufacturer of new handheld computer makes a sales pitch to a retailer in which he is willing to sell 5,000 at $10, 7,000 for $8, 9,000 for $7

But any orders above that amount will start costing the retailer more money on a per-unit basis. The president of the retailer asks why he can't get a discount if he orders more. Can you provide an answer that would help this president understand this apparent paradox?

The explanation is that the manufacturer apparently faces a U-shaped average cost curve. He is able to offer discounts up to the 9,000 unit level because that represents output on the downward-sloping side of the curve down to the minimum average total cost. Output levels past this point start driving the average total cost upwards.