Principles of Economics (Second Edition)
2nd Edition
ISBN: 9780393614077
Author: coppock, Lee; Mateer, Dirk
Publisher: W. W. Norton & Company
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Question
Chapter 12, Problem 1QFR
To determine
Product Differentiation
Expert Solution & Answer
Explanation of Solution
Product differentiation is very essential component of monopolistic market. Monopolistic market is an imperfect market situation where a large number of sellers sell their products which are distinct from one another. Product homogeneity leads to close substitutes to a particular product of a firm and this causes the firm to exercise no
In economics, 3 types of product differentiation are found.
- Vertical differentiation: When the customers compare one product on the basis of its quality it's called Vertical differentiation. One example of this scenario is − while purchase of biscuits a consumer can decide between two popular companies' produced biscuits.
- Horizontal differentiation: When products are differentiated in such a way that the consumers cannot easily evaluate them on the basis of their quality only, it's called Horizontal differentiation. In this case, the consumers are not so clear about the quality, so factors other than the quality drive them to compare the differentiated products. For example, when we buy cold drinks; taste, style, flavor, price etc. decide our choice.
- Mixed differentiation: This is the mixture of the 2 former scenarios. Products are differentiated in mixed manner of both vertical and horizontal differentiations in case of highly complex products.
Economics Concept Introduction
Introduction:
Product Differentiation or simply Differentiation refers to the system of the distinction of a product or service from others in order to make it more attractive and unique in the market. Differentiation is the key characteristic of the monopolistic market. Differentiated products help the firm or company to compete with the other popular and better products.
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Students have asked these similar questions
Problem 3
You are given the following demand for European luxury automobiles:
Q=1,000 P-0.5.2/1.6
where P-Price of European luxury cars
PA = Price of American luxury cars
P, Price of Japanese luxury cars
I= Annual income of car buyers
Assume that each of the coefficients is statistically significant (i.e., that they passed the t-test).
On the basis of the information given, answer the following questions
1. Comment on the degree of substitutability between European and American luxury cars and
between European and Japanese luxury cars. Explain some possible reasons for the results in
the equation.
2. Comment on the coefficient for the income variable. Is this result what you would expect?
Explain.
3. Comment on the coefficient of the European car price variable. Is that what you would expect?
Explain.
Problem 2:
A manufacturer of computer workstations gathered average monthly sales figures from its 56 branch
offices and dealerships across the country and estimated the following demand for its product:
Q=+15,000-2.80P+150A+0.3P+0.35Pm+0.2Pc
(5,234) (1.29) (175) (0.12) (0.17) (0.13)
R²=0.68 SER 786 F=21.25
The variables and their assumed values are
P = Price of basic model = 7,000
Q==Quantity
A = Advertising expenditures (in thousands) = 52
P = Average price of a personal computer = 4,000
P.
Average price of a minicomputer = 15,000
Pe Average price of a leading competitor's workstation = 8,000
1. Compute the elasticities for each variable. On this basis, discuss the relative impact that each
variable has on the demand. What implications do these results have for the firm's marketing
and pricing policies?
2. Conduct a t-test for the statistical significance of each variable. In each case, state whether
a one-tail or two-tail test is required. What difference, if any, does it make to…
You are the manager of a large automobile dealership who wants to learn more about the effective-
ness of various discounts offered to customers over the past 14 months. Following are the average
negotiated prices for each month and the quantities sold of a basic model (adjusted for various
options) over this period of time.
1. Graph this information on a scatter plot. Estimate the demand equation. What do the
regression results indicate about the desirability of discounting the price? Explain.
Month
Price
Quantity
Jan.
12,500
15
Feb.
12,200
17
Mar.
11,900
16
Apr.
12,000
18
May
11,800
20
June
12,500
18
July
11,700
22
Aug.
12,100
15
Sept.
11,400
22
Oct.
11,400
25
Nov.
11,200
24
Dec.
11,000
30
Jan.
10,800
25
Feb.
10,000
28
2. What other factors besides price might be included in this equation? Do you foresee any
difficulty in obtaining these additional data or incorporating them in the regression analysis?
Chapter 12 Solutions
Principles of Economics (Second Edition)
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