Most mountain bikes come equipped with either two 26-inch wheels or two 29-inch

Question

Most mountain bikes come equipped with either two 26-inch wheels or two 29-inch wheels. Tour Bicycles offers a special model with one 29-inch wheel on the front and a 26-inch wheel on the back. Tour claims the small rear wheel facilitates faster acceleration, while the bigger front wheel allows riders to clear obstacles more easily. Tour also uses lightweight components made from material that is stronger and more durable than the material used by some of its rivals What is the source of product differentiation of Tour's mountain bike? Check all that apply. O Quality Type Location True or False: Negative long-run profit can occur as a result of advertising in a monopolistically competitive market. True False

Explanation / Answer

Here Tour uses lightweight components made from materials that are stronger and more durable than that of the rival company's product. So the bicycle is differentiated by its quality. The first option is correct.

In monopolistically competitive market negative profit can occur in the short run due to advertising if P<ATC. But in the long run, some firms will exit due to negative profit. Demand curve shifts to the right and tangent with ATC. In the long run, Price is charged at the tangent of the demand curve and ATC. So, in the long run, there is no negative profit. Therefore the statement is false.

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