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Chapter 1: Q11 (page 17)

Starbucks has $1 billion to invest. It can either purchase a rival coffee shop chain or build additional Starbucks shops. If Starbucks chooses to purchase the rival chain, what does that say about the relative profitability of purchasing and owning the rival's existing shops versus building additional Starbucks shops? Explain.

Short Answer

Expert verified

The relative profitability will be higher. The projected difference between the marginal benefit and marginal cost would be higher for purchasing a rival chain than setting up a new outlet.

Step by step solution

01

Meaning of relative profitability

Profitability is the difference between the marginal benefit and marginal cost of a project. Starbucks will study both projects and compare the marginal benefit and marginal cost associated with each project to determine the profitability it can gain from both.

02

The reason behind the choice of Starbucks

On comparing the profitability associated with both projects, the company will compare them to identify which project yields higher profitability. Starbucks will choose the project whose profitability will be higher than the other project.

In other words, the project whose relative profitability would be higher will be chosen by Starbucks over the other one. Thus, the decision of Starbucks to purchase the rival chain instead of setting up a new outlet shows that the relative profitability is higher for the former than the latter.

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Most popular questions from this chapter

What are economic resources? What categories do economists use to classify them? Why are resources also called factors of production? Why are they called inputs? t are economic resources? What categories do economists use to classify them? Why are resources also called factors of production? Why are they called inputs?

Refer to Figure 1.3. Suppose that the cost of cheese falls so that the marginal cost of producing pizza decreases. Will the MC curve shift up or down? Will the optimal amount of pizza increase or decrease? Explain.

For each of the following situations involving marginal cost (MC) and marginal benefit (MB), indicate whether it would be best to produce more, fewer, or the current number of units.

a. 3,000 units at which MC = \(10 and MB = \)13.

b. 11 units at which MC = \(4 and MB = \)3.

c. 43,277 units at which MC = \(99 and MB = \)99.

d. 82 units at which MC < MB.

e. 5 units at which MB < MC.

Suppose you won \(15 on a lotto ticket at the local 7-Eleven and decided to spend all the winnings on candy bars and bags of peanuts. Candy bars cost \)0.75 each, while bags of peanuts cost \(1.50 each.

  1. Construct a table showing the alternative combinations of the two products that are available.
  2. Plot the data in your table as a budget line in a graph. What is the slope of the budget line? What is the opportunity cost of one more candy bar? What is the opportunity cost of one more bag of peanuts? Do these opportunity costs rise, fall, or remain constant as additional units are purchased?
  3. Does the budget line tell you which of the available combinations of candy bars and bags of peanuts to buy?
  4. Suppose thatyou had won \)30 on your ticketnot \(15. Show the \)30 budget line in your diagram. Has the number of available combinations increased or decreased?

How does the slope of a budget line illustrate opportunity costs and trade-offs? How does a budget line illustrate scarcity and the effect of limited incomes?

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