AutoCorp is a reputed automobile manufacturer while SUVmart is an independent distributor who buys automobiles from the former.During the current year,SUVmart wants to buy 250 Rhinos from AutoCorp who wants to charge an upfront franchise fee.The franchise fee charged by it:
A)can be anything below MC so as to guarantee SUVmart's profits.
B)can be anything above MC so as to guarantee some profits for AutoCorp.
C)has to be equal to TC so that AutoCorp breaks even on the deal.
D)has to be equal to MC.

Question

Quizplus · Accepted Answer

The best choice is (D) as the franchise fee charged by AutoCorp should be equal to MC (Marginal Cost) which is the cost of producing one additional unit of the product. This would ensure that AutoCorp charges just enough to cover its costs and avoid any losses. If the fee charged is above MC, it would lead to excess profits for AutoCorp which would be unfair to SUVmart. Similarly, if the fee charged is below MC, it would lead to losses for AutoCorp and might discourage future business with SUVmart. Therefore, the franchise fee should be equal to MC to ensure fairness and sustainability for both parties involved.

AutoCorp Is a Reputed Automobile Manufacturer While SUVmart Is an Independent