A Firm That Is First to the Market with a New

question 158

Multiple Choice

A firm that is first to the market with a new product frequently discovers that there are design flaws or problems with the product that were not anticipated.How do these problems affect the innovating firm?

• A)The firm is protected by a first-mover advantage: initial design flaws tend not to harm a firm significantly because consumers resist changing products for fear of incurring high switching costs.
• B)They reduce profits for the new innovations and open the door to competitors who can enter the new market with a better product.
• C)Because these design flaws were not anticipated, consumers tend to be more forgiving and are likely to remain loyal to the company and its products.
• D)The firm's cost increases as it improves the product but it will not be able to raise its price for fear of alienating customers. Consequently, its profits will erode although its market share remains secure.

---

Definitions:

Marginal Propensity

Refers to the increase in personal consumer spending that occurs with an increase in disposable income.

Aggregate Expenditure

The total amount spent on goods and services in an economy at a given level of income during a specific period.

Marginal Propensity

The ratio of the change in consumption or saving to the change in income, indicating how income changes affect spending or saving behaviors.

Aggregate Expenditure

The total amount of spending in the economy that includes consumer spending, investment, government spending, and net exports.