Firms like McDonald\'s and Wendy\'s sell hamburgers, salads, and other products
ID: 1226596 • Letter: F
Question
Firms like McDonald's and Wendy's sell hamburgers, salads, and other products that are differentiated in nature. While numerous fast-food restaurants exist in most locations, the differentiated nature of the firms' products permits them to charge prices that are in excess of marginal cost. b. Given their current menus, explain what level of economic profit these firms can expect to make in the long run? c. What strategies could the firms use to increase the possibilities of earning positive economics profits in the long run?
Explanation / Answer
The structure defined most probably closed down to the monopolistically competitive market where the products are differentiated on the basis of size, shape, quality, fragrance etc. The market price is determined by equality between MR and MC curves but the firms in monopolistic competitive market take away the consumer surplus from the consumers by charging price equal to the willingness to pay of the consumer.
In long run the firms in the monopolistic competitive market will always earn normal profits.
If the firms want to increase the profits then they can 1. Reduce the price of the commodity or 2. Increase the selling costs or advertisement of the product.
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