Chapter 12R, Problem 5MCQ

To determine

The correct option for reason where firms can charge higher prices if brand name is created.

Answer to Problem 5MCQ

Option e is correct.

Explanation of Solution

Explanation for correct option:

e.

Firms by creating brand name add value to their product. By doing so they differentiate the product by offering better quality or additional features in the same utility product. This allows these firms to charge higher prices even if all information is available. Therefore, option e is correct.

Explanation for incorrect options:

a.

Brand name creation is not at all the sign for cartel and collusion as it is an individual activity. Therefore, option a is incorrect.

b.

Profit maximization is possible if customers’ base is increased. If dominant strategy I followed then it is not necessary to maximize its profit. Therefore, option b is also incorrect.

c.

By creating brand name it is not necessary that every firm can be converted into monopolies and can charge higher prices. Therefore, option c is incorrect.

d.

If higher prices are charged then firm may face huge losses as customers are provided with all information. Brand name may allow a firm to become price leader but not because of charging higher prices. Therefore, option d is incorrect.

Economics Concept Introduction

Brand name: Brand name refers to the logo, company name, etc. that provide different recognition to the product by adding some value to its quality or its functioning.