Scenario 17-2 Consider the Problem Facing Two Firms, Firm a and Firm

question 214

Multiple Choice

Scenario 17-2
Consider the problem facing two firms, Firm A and Firm B, in the fast-food restaurant market. Each firm has just come up with an idea for a new fast-food menu item which it would sell for $4. Assume that the marginal cost for each new menu item 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 2 million consumers to try its new product. Firm A has done market research which suggests that its product does not have any "staying" power in the market. Even though it could get 2 million consumers to buy the product once, it is unlikely that they will continue to buy the product in the future. Firm B'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, Firm B estimates that its initial 2 million customers will buy one unit of the product each month in the coming year, for a total of 24 million units.
-Refer to Scenario 17-2.If firm B decides to advertise its product it can expect to

• A)have a profit of $48 million per year.
• B)have a profit of $36 million per year.
• C)incur a loss of $12 million per year.
• D)exit the industry.

---

Definitions:

Private Good

A type of good that is both excludable and rivalrous, meaning that non-paying consumers can be prevented from accessing it and its consumption by one individual prevents others from using it.

Utility Function

A mathematical representation in economics that captures the preference orderings of various bundles of goods for an individual or entity.

Private Consumptions

refers to the total amount of goods and services consumed by private households.

Total Amount

The sum of all quantities or values in a given context.