Answered: A fast-food restaurant decides to raise…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Transcribed Image Text:**Title: Understanding Demand in Monopolistically Competitive Markets** **Context:** A fast-food restaurant decides to raise the price of its hamburgers. Assume the firm is in a monopolistically competitive industry. What will happen to the demand for its hamburgers? **Question:** When the fast-food restaurant raises the price of hamburgers, **Answer Options:** - **A.** All of its customers will be willing to pay the higher price because this restaurant is close to them. - **B.** Some of its customers will be willing to pay a higher price because they prefer this brand of hamburgers. - **C.** All of its customers will be willing to pay the higher price because this restaurant faces no competition. - **D.** None of its customers will be willing to pay the higher price because this restaurant faces competition from other restaurants. - **E.** None of its customers will be willing to pay the higher price and will stop buying hamburgers. **Explanation of Concepts:** In a monopolistically competitive industry, firms have some degree of market power due to product differentiation. This means that while they are not the only providers of a particular type of product, they can still set prices above marginal cost due to brand loyalty or perceived differences in quality. **Analysis of the Options:** - **Option A:** Unlikely, as proximity alone may not justify paying a higher price if substitutes are readily available elsewhere. - **Option B:** Possible, as brand loyalty might lead some customers to continue purchasing even at higher prices. - **Option C:** Unlikely, since the presence of competition is an inherent characteristic of monopolistically competitive markets. - **Option D:** Possible, as increased competition might deter customers from paying a higher price. - **Option E:** Unlikely, as typically some consumers are less price-sensitive and may continue purchasing despite price increases. This scenario highlights consumer behavior and market dynamics in situations where firms have some pricing power but still face competitive pressures.

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