Figure 12.1 Assume That Lexus (L)is the First Automobile Company to Produce

question 103

Multiple Choice

Figure 12.1

Assume that Lexus (L) is the first automobile company to produce a luxury class hybrid automobile and is the only such company for the past four years. BMW is now considering producing its own luxury hybrid automobile and Lexus must decide whether or not to lower the price of its luxury hybrid to counter BMW's entry into the luxury hybrid niche.
-Refer to Figure 12.1.Should Lexus lower its price in order to deter BMW's entry into the luxury hybrid automobile market?

• A)In terms of profit earned, it makes no difference whether Lexus lowers its price or not; in either case it will make $280 million profit if BMW enters.
• B)No, it should keep the same price and work to capitalize on its brand loyalty.
• C)Yes, it will drive BMW out of the market.
• D)No, because BMW will enter the market regardless of Lexus' decision about its price.

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Definitions:

Maximizing Profits

The process or strategy of adjusting the production and sale of goods and services to achieve the highest possible profit.

Fixed Costs

Costs that do not change with the level of output produced, such as rent, salaries, or insurance expenses.

Maximizing Profits

The process of increasing the difference between revenue and costs to achieve the highest possible financial gain.

Economic Profit

The surplus remaining after total costs are subtracted from total revenue, considering both explicit and implicit costs.