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

question 219

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.By its willingness to spend money on advertising,Firm B

• A)signals the quality of its new product to consumers.
• B)signals that it is not a profit maximizer.
• C)is detracting from the efficiency of markets.
• D)will drive Firm A out of the market.

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Definitions:

Breaches its Lease

Occurs when one party fails to fulfill their contractual obligations under the terms of a lease agreement.

Premises

A building or land specified in a legal document or agreement, often related to business or residency.

Penalize

To subject an individual or entity to a disadvantage or punishment for violations of laws, rules, or contracts.

Not Enforceable

Describes a contract or legal obligation that cannot be legally imposed or compelled by law due to issues such as illegality or lack of proper form.