Refer to Figure 14-6 Use the decision tree to determine whether Pizza Hut should deter Domino's from entering the market for pasta salad. Assume that each firm must earn a 25% return on investment to break even. Explain Pizza Hut's decision process
What will be an ideal response?
If Pizza Hut charges $7.49 for its pasta salad, Domino's will enter the market because the rate of return represents an economic profit. If Pizza Hut charges $4.99, Domino's will not enter the market. By charging $4.99, Pizza Hut deters Domino's entry into the market and earns a return on investment of 30%, which is better than the return of 28% it would earn by charging the higher price and having Domino's enter the market.
You might also like to view...
Credibility is important to successful anti-inflationary policy in ________
A) new Keynesian theory B) traditional Keynesian theory C) real business cycle theory D) post classical theory
An increase in the real wage
A) represents a pure substitution effect. B) represents a pure income effect. C) represents a combination of income and substitution effects. D) causes a parallel shift in the consumer's budget line.