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Chapter 12: Problem 8

(Related to Solved Problem 12.6 on page 439 ) Sony suffered losses selling televisions from 2004 to \(2013,\) before finally earning a small profit on this business from 2014 to 2016. Given the strong consumer demand for plasma, LCD, and LED television sets, shouldn't Sony have been able to raise prices to earn a profit during that decade of losses? Briefly explain.

Short Answer

Expert verified
Despite high demand, Sony might not have been able to increase prices for various reasons: the competitive landscape, product positioning, and production costs. Hence, the assumption that high demand should automatically lead to increased prices doesn't always hold due to these market dynamics.

Step by step solution

01

Understanding Market Conditions

The first point to scrutinize this situation is to understand the market conditions. When the demand for a product is high, ideally, an increase in price should lead to increased profits. However, this is not always the case, and there are several reasons why. A market is not only shaped by consumer demand but also by competition, product positioning, and production costs.
02

Analyze the Competition

In the case of Sony, they weren't the only company producing plasma, LCD, and LED television sets. There was stiff competition from other players in the market like Samsung, LG, and so on. Due to intense competition, Sony might not have been able to significantly increase their prices without losing market share to competitors.
03

Inspect Product Positioning

Sony has always positioned itself as a premium brand in the market. However, during the period mentioned (2004-2013), many budget and medium-tier brands entered the TV market providing similar products at much cheaper prices. Even though Sony was a popular brand, customers might have opted for cheaper alternatives, thus making it harder for Sony to increase their prices.
04

Contemplate Production Costs

Another consideration is the cost of production. The cost of producing plasma, LCD, and LED television sets reduces over time due to improvements in technology and manufacturing processes. This could mean that even with strong consumer demand, the cost of producing the TVs might not have permitted an increase in prices.

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Most popular questions from this chapter

In 2017 , Apple reported that since its iTunes App Store had opened in 2008 , third-party app developers had earned more than \$60 billion and currently employed 1.4 million people. Yet, as we've seen, because of intense competition, many game developers can only break even on the games they develop. Given this outcome, would we expect individuals and companies to continue developing games in the long run? Briefly explain.

Suppose that most wheat farms are suffering losses. Now suppose that a new scientific study shows that eating four slices of whole wheat bread per day is an effective means of weight control, lowers blood pressure, and reduces the likelihood of heart disease. Assume that this study leads to the typical wheat farm earning an economic profit. Use two graphs to illustrate the effect of the release of the study: one graph showing the effect on the market for wheat and another graph showing the effect on a representative wheat farm. Be sure your graph for the wheat market shows any shifts in the market demand and supply curve and any changes in the equilibrium market price. Be sure that your graph for the representative farm includes its marginal revenue curve, marginal cost curve, average total cost curve, any change in its demand curve, and the area showing its loss before the release of the study and its profit after the release.

Frances sells pencils in the perfectly competitive pencil market. Her output per day and her total cost are shown in the following table: $$ \begin{array}{|c|c|} \hline \text { Output per Day } & \text { Total Cost } \\ \hline 0 & \$ 1.00 \\ \hline 1 & 2.50 \\ \hline 2 & 3.50 \\ \hline 3 & 4.20 \\ \hline 4 & 4.50 \\ \hline 5 & 5.20 \\ \hline 6 & 6.80 \\ \hline 7 & 8.70 \\ \hline 8 & 10.70 \\ \hline 9 & 13.00 \\ \hline \end{array} $$ a. If the current equilibrium price in the pencil market is \(\$ 1.80,\) how many pencils will Frances produce, what price will she charge, and how much profit (or loss) will she make? Draw a graph to illustrate your answer. Your graph should be clearly labeled and should include Frances's demand, \(A T C, A V C, M C,\) and \(M R\) curves; the price she is charging; the quantity she is producing; and the area representing her profit (or loss). b. Suppose the equilibrium price of pencils falls to \(\$ 1.00\). Now how many pencils will Frances produce, what price will she charge, and how much profit (or loss) will she make? Show your work. Draw a graph to illustrate this situation, using the instructions in part (a). c. Suppose the equilibrium price of pencils falls to \(\$ 0.25 .\) Now how many pencils will Frances produce, what price will she charge, and how much profit (or loss) will she make?

When are firms likely to enter an industry? When are they likely to exit an industry?

The chapter states, "Firms will supply all those goods that provide consumers with a marginal benefit at least as great as the marginal cost of producing them." A student objects to this statement, arguing, "I doubt that firms will really do this. After all, firms are in business to make a profit; they don't care about what is best for consumers." Evaluate the student's argument.
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