Scenario 16-7
Consider the problem facing two firms, YumYum and Bertollini, in the frozen food market. Each firm has just come up with an idea for a new "frozen meal for two" which it would sell for $9. Assume that the marginal cost for each new product 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 1.5 million consumers to try its new product. YumYum has done market research which suggests that its product does not have any "staying" power in the market. Even though it could get 1.5 million consumers to buy the product once, it is unlikely that they will continue to buy the product in the future. Bertollini'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, Bertollini estimates that its initial 1.5 million customers will buy one unit of the product each month in the coming year, for a total of 18 million units.
-Refer to Scenario 16-7. If YumYum decides to advertise its product it can expect to
A)incur a loss of $15 million.
B)incur a loss of $1.5 million.
C)earn a profit of $1.5 million.
D)earn a profit of $13.5 million.

Question

Quizplus · Accepted Answer

If YumYum advertises its product, it will spend $12 million on advertising and will earn revenue of $9 million (1.5 million units sold at $9 each). However, since the product does not have any staying power in the market, it is unlikely that these 1.5 million consumers will continue to buy the product in the future. Therefore, YumYum will not make any additional revenue from these customers in the coming year. The total cost for YumYum will be $14 million ($12 million for advertising and $2 million for marginal cost). Thus, YumYum will incur a loss of $1.5 million ($9 million revenue - $14 million cost = -$5 million loss).

Scenario 16-7 Consider the Problem Facing Two Firms, YumYum and Bertollini, in Bertollini