Scenario 16-7 Consider the Problem Facing Two Firms, YumYum and Bertollini, in Bertollini

question 547

Multiple Choice

Scenario 16-7
Consider the problem facing two firms, YumYum and Bertollini, in the frozen food market. Each firm has just come up with an idea for a new "frozen meal for two" which it would sell for $9. Assume that the marginal cost for each new product is a constant $2, and the only fixed cost is for advertising. Each company knows that if it spends $12 million on advertising it will get 1.5 million consumers to try its new product. YumYum has done market research which suggests that its product does not have any "staying" power in the market. Even though it could get 1.5 million consumers to buy the product once, it is unlikely that they will continue to buy the product in the future. Bertollini's market research suggests that its product is very good, and consumers who try the product will continue to be consumers over the ensuing year. On the basis of its market research, Bertollini estimates that its initial 1.5 million customers will buy one unit of the product each month in the coming year, for a total of 18 million units.
-Refer to Scenario 16-7. Suppose YumYum has an opportunity to create a cheaper advertising campaign in newspapers rather than on television for its new product. This campaign will cost $8 million and is expected to result in the same 1.5 million one-time customers. YumYum should

• A)invest in the cheaper campaign because they will earn a profit.
• B)invest in the cheaper campaign because they will signal the high quality of their product.
• C)not invest in the cheaper campaign because they will incur a loss.
• D)not invest in the cheaper campaign because their brand name will be negatively affected.

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Definitions:

Consumer Surplus

The difference between the total amount consumers are willing to pay for a good or service versus the total amount they actually pay.

Total Surplus

The sum of consumer surplus and producer surplus, representing the total benefit to society from the production and consumption of goods or services.

Inferior Good

A type of good for which demand decreases as the income of the consumer increases, opposite to a normal good.

Total Surplus

The sum of consumer surplus and producer surplus in a market, representing the total net benefit to society from the production and consumption of goods and services.