Long long ago, in Oyesta valley in Europe, there lived a young girl named Cathy. She sold hot cross buns , she was one among several large bakers. All households in Oyesta valley sold hot cross buns to entire Europe. Coincidentally, the buns were identical in every respect, and no one could ever make out from which bakery these buns were. Everybody in Oyesta valley was comfortable and happy. But Cathy was unhappy as she was an ambitious girl and no matter how hard she tried she could not sell buns at a higher price than other bakers. She wanted her buns to be different and wanted to charge higher prices. One foggy Christmas morning, a student from IBS from a class of 2023, time travelled and reached Oyesta valley. The student encouraged Cathy by saying she could charge a higher price, if she slightly changed the recipe, and put out pamphlets that her buns are different in flavor, shape, and size. Cathy heeded the advice and started sharing pamphlets saying her buns are different from the rest. Soon, many others followed her example. Some who could not follow perished. However, even after a few months, the valley had many bakers who decorated their shop and spent huge amounts on promotion of differentiated buns. Many of them could price them higher including Cathy. They became highly prosperous, charging way higher than average cost. Cathy and the bakers were thankful to the student, However, he warned them that soon these extra profits would dry up.

Based on the above caselet answer the following questions :

A. How did the transition affect the market structure and comment on Cathy’s profit maximizing output before and after the transition. (5 Marks)

B. Explain IBS student’s advice to Cathy regarding product differentiation and how the long run profits were affected.

Answer rating: 100% (QA)

Answer A The transition affected the market structure by making it more competitive Cathys profit ma... View the full answer