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Chapter 12: Problem 9

In 2017 , two beer drinkers in California filed a lawsuit against Kona Brewing Company, which sells Kona beer. The beer drinkers claimed that Kona was marketed as if it were brewed in Hawaii, but the beer is actually brewed in Oregon, Washington, Tennessee, and New Hampshire. If the market for beer were perfectly competitive, would the location of breweries matter to consumers? Briefly explain.

Short Answer

Expert verified
In a perfectly competitive market, the location of breweries would not matter to consumers as long as the quality, price, and availability of the beer remains unchanged. Consumers are concerned with these factors rather than the location of production.

Step by step solution

01

Understanding Perfect Competition

To start with, perfect competition is an ideal type of market structure where there are many buyers and sellers, the products are homogenous or identical, and all buyers and sellers have perfect information about the market.
02

Assess the Importance of Brewery Location

In the context of beer consumers, the location of the breweries would matter if it has an effect on the quality, price or availability of the beer. Given the details of this case, Kona beer might be marketed as if it's made in Hawaii, but in perfect competition, what matters is whether the beer still meets customers' expectations in terms of quality, price, and availability.
03

Evaluate the Scenario

In a perfectly competitive market, as consumers have perfect information and the products are homogenous, the location of breweries should not matter. What would matter is if the change in location leads to changes in the price, taste or quality of the beer. Assuming that the beer made in all these locations has the same price, taste, and quality, it should not affect the consumer's buying decision.

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Most popular questions from this chapter

Draw a graph showing a firm that is making a profit in a perfectly competitive market. Be sure your graph includes the firm's demand curve, marginal revenue curve, marginal cost curve, average total cost curve, and average variable cost curve, and make sure to indicate the area representing the firm's profit.

The financial writer Andrew Tobias described an incident that occurred when he was a student at the Harvard Business School: Each student in the class was given large amounts of information about a particular firm and asked to determine a pricing strategy for the firm. Most of the students spent hours preparing their answers and came to class carrying many sheets of paper with their calculations. Tobias came up with the correct answer after just a few minutes and without having made any calculations. When his professor called on him in class for an answer, Tobias stated: "The case said the XYZ Company was in a very competitive industry ... and the case said that the company had all the business it could handle." Given this information, what price do you think Tobias argued the company should charge? Briefly explain. (Tobias says the class greeted his answer with "thunderous applause.")

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.

(Related to the Chapter Opener on page 414) By 2017, McDonald's had stopped selling Chicken McNuggets and other products made from chickens that had been fed antibiotics. The change increased McDonald's costs, but an article in the Wall Street Journal noted that "McDonald's ability to raise its prices is limited because of stiff competition." Does this "stiff competition" mean that the demand curve for McDonald's Chicken McNuggets is horizontal? Briefly explain.

What is a price taker? When are firms likely to be price takers?
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