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

Question

Quizplus · Accepted Answer

Firm B should advertise its product since it has staying power in the market and can generate future profits. The advertising cost will be $12 million, which will attract 2 million customers who will buy a total of 24 million units over the coming year. Thus, the revenue will be 24 million units x $4 per unit = $96 million. The total cost will be the sum of the advertising cost and the cost of producing 24 million units, which will be $12 million + (24 million units x $2 per unit) = $60 million. Therefore, the profit will be $96 million - $60 million = $36 million.

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