Figure 111 Assume That Lexus (L)is the First Automobile Company

question 108

Multiple Choice

Figure 11.1 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 11.1.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 capitalise 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:

Purely Competitive

Describes a market structure where many firms sell identical products, and no single seller can influence the market price.

Short Run

Within the field of economics, a timeframe where a company has at least one input that remains constant and unalterable.

Total Revenue

The entire revenue a company earns from selling products or services before deducting any costs.

Purely Competitive

A market structure characterized by many buyers and sellers, freely entering and exiting the market, with all firms selling identical or nearly identical products.