Answered: Briefly explain any two observations…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

See similar textbooks

Related questions

Question

Refer to text 'Monopolistic Competition in the Markets for Colas and Coffee'. on the image inserted

Briefly explain any two observations regarding the differences in the price elasticities for colas and ground coffee.

Transcribed Image Text:Monopolistic Competition in the Markets for Colas and Coffee The markets for soft drinks and coffee illustrate the characteristics of monopolistic competition. Each market has a variety of brands that differ slightly but are close substitutes for one another. Each brand of cola, for example, tastes a little different from the next. (Can you tell the difference between Coke and Pepsi? Between Coke and RC Cola?) And each brand of ground coffee has a slightly different flavor, fragrance, and caffeine content. Most consumers develop their own preferences; you might prefer Maxwell House coffee to other brands and buy it regularly. Brand loyalties, however, are usually limited. If the price of Maxwell House were to rise substantially above those of other brands, you and most other consumers who had been buying it would probably switch brands. LITER herry 24 Cher A&P 3 LITER Cola 1 LITER Lica-Cola 3 LITER 1014 FL OZ (3 Just how much monopoly power does General Foods, the producer of Maxwell House, have with this brand? In other words, how elastic is the demand for Maxwell House? Most large companies carefully study product demands as part of their market research. Company estimates are usually proprietary, but two published studies of the demands for various brands of colas and ground coffees used simulated shopping experiments to determine how market shares for each brand would change in response to specific changes in price. Table 12.1 summarizes the results by showing the elasticities of demand for several brands.1

Transcribed Image Text:Table 12.1 Elasticities of Demand for Brands of Colas and Coffee Colas Ground coffee RC Cola Coke Folgers Brand Maxwell House Chock Full o'Nuts Elasticity of Demand -2.4 -5.2 to -5.7 -6.4 -8.2 -3.6 First, note that among colas, RC Cola is much less price elastic than Coke. Although it has a small share of the cola market, its taste is more distinctive than that of Coke, Pepsi, and other brands, so consumers who buy it have stronger brand loyalty. But even though RC Cola has more monopoly power than Coke, it is not necessarily more profitable. Profits depend on fixed costs and volume, as well as price. Even if its average profit is smaller, Coke will generate more profit because it has a much larger share of the market. Second, note that coffees as a group are more price elastic than colas. There is less brand loyalty among coffee buyers than among cola buyers because the differences among coffees are less perceptible than the differences among colas. Note that the demand for Chock Full o' Nuts is less price elastic than its competitors. Why? Because Chock Full o' Nuts, like RC Cola, has a more distinctive taste than Folgers or Maxwell House, and so consumers who buy it tend to remain loyal. Fewer consumers notice or care about the taste differences between Folgers and Maxwell House. With the exception of RC Cola and Chock Full o' Nuts, all the colas and coffees are quite price elastic. With elasticities on the order of -4 to -8, each brand has only limited monopoly power. This is typical of monopolistic competition.

Expert Solution

Trending now

This is a popular solution!

Step by step

Solved in 4 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.

Similar questions