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Micro

In: Business and Management

Submitted By loantran258
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Answers to the Problems and Applications
1. Which of the following news items involves a short-run decision and which involves a long-run decision? Explain
January, 31, 2008: Starbucks will open 75 more stores abroad than originally predicted, for a total of 975.
This decision is a long-run decision. It increases the quantity of all of Starbucks’ factors of production, labor and the size of Starbucks’ plant.
February, 25, 2008: For three hours on Tuesday, Starbucks will shut down every single one of its 7,100 stores so that baristas can receive a refresher course.
This decision is a short-run decision. It involves increasing the quality of Starbucks’ labor and so only one factor of production—labor—changes and all the other factors remain fixed.
June, 2, 2008: Starbucks replaces baristas with vending machines.
This decision is a short-run decision. It involves changing two of Starbucks’ factors of production, labor and one type of capital. But other factors of production, such as Starbucks’ land and other capital inputs such as the store itself, remain fixed.
July, 18, 2008: Starbucks is closing 616 stores by the end of March.
This decision is a long-run decision. It decreases the quantity of all of Starbucks’ factors of production, labor and the size of Starbucks’ plant. Labor
(workers
per week) | Output
(surfboards
per week) | 1 | 30 | 2 | 70 | 3 | 120 | 4 | 160 | 5 | 190 | 6 | 210 | 7 | 220 |
2. The table sets out Sue’s Surfboards’ total product schedule.
a. Draw the total product curve.
To draw the total product curve measure labor on the x-axis and output on the y-axis. The total product curve is upward sloping and is illustrated in Figure 11.1.
b. Calculate the average product of labor and draw the average product curve.
The average product of labor is equal to total product divided by the quantity of labor employed. For example, when 3 workers are employed, they produce 120 surfboards a week, so average product is 40 surfboards per worker. As Figure 11.2 (on the next page) shows, the average product curve is upward sloping when up to 3 workers are hired and then is downward sloping when more than 4 workers are hired.
c. Calculate the marginal product of labor and draw the marginal product curve.
The marginal product of labor is equal to the increase in total product that results from a one-unit increase in the quantity of labor employed. For example, when 3 workers are employed, total product is 120 surfboards a week. When a fourth worker is employed, total product increases to 160 surfboards a week. The marginal product of increasing the number of workers from 3 to 4 is 40 surfboards. We plot the marginal product at the halfway point, so at a quantity of 3.5 workers, the marginal product is 40 surfboards per worker per week. As Figure 11.2 (on the next page) shows, the marginal product curve is upward sloping when up to 2.5 workers a week are employed and it is downward sloping when more than 2.5 workers a week are employed.
d. Over what output range does the firm enjoy the benefits of increased specialization and division of labor?
The firm enjoys the benefits of increased specialization and division of labor over the range of output for which the marginal cost decreases. This range of output is the same range over which the marginal product of labor rises. For Sue’s Surfboards, the benefits of increased specialization and division of labor occur until 2.5 workers are employed.
e. Over what output range does the firm experience diminishing marginal product of labor?
The marginal product of labor decreases after 2.5 workers are employed.
f. Over what output range does this firm experience an increasing average product of labor but a diminishing marginal product of labor?
The marginal product of labor decreases and the average product of labor increases between 2.5 and 3.5 workers.
g. Explain how it is possible for a firm to experience simultaneously an increasing average product but a diminishing marginal product.
As long as the marginal product of labor exceeds the average product of labor, the average product of labor rises. For a range of output the marginal product of labor, while decreasing, remains greater than the average product of labor, so the average product of labor rises. Each additional worker, while producing less than the previous worker hired is still producing more than the average worker.
3. Sue’s Surfboards, in problem 2, hires workers at $500 a week and its total fixed cost is $1,000 a week.
a. Calculate total cost, total variable cost, and total fixed cost of each output in the table. Plot these points and sketch the short-run total cost curves passing through them.
Total cost is the sum of the costs of all the factors of production that Sue’s Surfboards uses. Total variable cost is the total cost of the variable factors. Total fixed cost is the total cost of the fixed factors. For example, the total variable cost of producing 120 surfboards a week is the total cost of the workers employed, which is 3 workers at $500 a week, which equals $1,500. Total fixed cost is $1,000, so the total cost of producing 120 surfboards a week is $2,500. Figure 11.3 shows these total cost curves.
b. Calculate average total cost, average fixed cost, average variable cost, and marginal cost of each output in the table. Plot these points and sketch the short-run average and marginal cost curves passing through them. Output
(surfboards) | AFC
(dollars per surfboard) | AVC
(dollars per surfboard) | ATC
(dollars per surfboard) | MC
(dollars per surfboard) | 30 | 33.33 | 16.67 | 50.00 | | | | | | 12.50 | 70 | 14.29 | 14.29 | 28.58 | | | | | | 10.00 | 120 | 8.33 | 12.50 | 20.83 | | | | | | 12.50 | 160 | 6.25 | 12.50 | 18.75 | | | | | | 16.67 | 190 | 5.26 | 13.16 | 18.42 | | | | | | 25.00 | 210 | 4.76 | 14.29 | 19.05 | | | | | | 50.00 | 220 | 4.55 | 15.91 | 20.46 | |
Average fixed cost is total fixed cost per unit of output. Average variable cost is total variable cost per unit of output. Average total cost is the total cost per unit of output. For example, take the case in which the firm makes 160 surfboards a week. Total fixed cost is $1,000, so average fixed cost is $6.25 per surfboard; total variable cost is $2,000, so average variable cost is $12.50 per surfboard; and, total cost is $3,000, so average total cost is $18.75 per surfboard. Marginal cost is the increase in total cost divided by the increase in output. For example, when output increases from 120 to 160 surfboards a week, total cost increases from $2,500 to $3,000, an increase of $500. This $500 increase in total cost means that the increase in output of 40 surfboards increases total cost by $500. Marginal cost is equal to $500 divided by 40 surfboards, which is $12.50 a surfboard. The table shows these data schedules and the curves are plotted in Figure 11.4.
c. Illustrate the connection between Sue’s AP, MP, AVC, and MC curves in graphs like those in Fig. 11.6. Labor
(workers) |
Output
(surfboards) | AP
(surfboards per worker) | MP
(surfboards per worker) | AVC
(dollars per surfboard) | MC
(dollars per surfboard) | 1 | 30 | 30.0 | | 16.67 | | | | | 40.0 | | 12.50 | 2 | 70 | 35.0 | | 14.29 | | | | | 50.0 | | 10.00 | 3 | 120 | 40.0 | | 12.50 | | | | | 40.0 | | 12.50 | 4 | 160 | 40.0 | | 12.50 | | | | | 30.0 | | 16.67 | 5 | 190 | 38.0 | | 13.16 | | | | | 20.0 | | 25.00 | 6 | 210 | 35.0 | | 14.29 | | | | | 10.0 | | 50.00 | 7 | 220 | 31.4 | | 15.91 | |
The table sets out the AP and MP data used to draw the curves. Figure 11.5 shows the curves and the relationships. When the AP curve rises the AVC curve falls and vice versa. When the MP curve rises the MC curve falls and vice versa.
4. Sue’s Surfboards, in problems 2 and 3, rents the factory building and the rent is increased by $200 a week. If other things remain the same, how do Sue’s Surfboards’ short-run average cost curves and marginal cost curve change.
The rent is a fixed cost, so total fixed cost increases. The increase in total fixed cost increases total cost but does not change total variable cost. Average fixed cost is total fixed cost per unit of output. The average fixed cost curve shifts upward. Average total cost is total cost per unit of output. The average total cost curve shifts upward. The marginal cost curve and average variable cost curve do not change.

5. Workers at Sue’s Surfboards, in problems 2 and 3, negotiate a wage increase of $100 a week for each worker. If other things remain the same, explain how Sue’s Surfboards’ short-run average cost curve and marginal cost curve change.
The increase in the wage rate is a variable cost, so total variable cost increases. The increase in total variable cost increases total cost but total fixed cost does not change. Average variable cost is total variable cost per unit of output. The average variable cost curve shifts upward. Average total cost is total cost per unit of output. The average total cost curve shifts upward. The marginal cost curve shifts upward. The average fixed cost curve does not change.
6. Sue’s Surfboards, in problem 2, buys a second plant and the output produced by each worker increases by 50 percent. The total fixed cost of operating each plant is $1,000 a week. Each worker is paid $500 a week.
a. Calculate the average total cost of producing 180 and 240 surfboards a week when Sue’s Surfboards operates two plants. Graph these points and sketch the ATC curve.
To calculate the average total cost when two plants are operated, recall that total cost is the cost of all the factors of production. For example, when 4 workers are employed they now produce 240 surfboards a week. With 4 workers, the total variable cost is $2,000 a week and the total fixed cost is (coincidentally also) $2,000 a week. Hence the total cost is $4,000 a week. The average total cost of producing 240 surfboards is $16.67 a surfboard. Similarly the average total cost of producing 180 surfboards is $19.44. To graph the ATC curve the average total costs at all the quantities are required. Figure 11.6 shows the average total cost curve, ATC2 when Sue’s operates two plants. (It also shows Sue’s average total cost curve, ATC1, when Sue operates one plant.)
b. To produce 180 surfboards a week, is it efficient to operate one or two plants?
The long-run average cost curve is made up of the lowest parts of the firm's short-run average total cost curves when the firm operates one plant and two plants. The long-run average cost curve is illustrated in Figure 11.6 as the darker part of the two ATC curves. At lower levels of output the LRAC curve is derived from operating one plant while at higher levels it is derived from operating two plants. The LRAC curve shows that to produce 180 surfboards it is efficient to operate 1 plant.
c. To produce 160 surfboards a week, is it efficient for Sue’s to operate one or two plants?
The LRAC curve shows that to produce 160 surfboards it is efficient to operate 1 plant.
7. Airlines Seek Out New Ways to Save on Fuel as Costs Soar The financial pain of higher fuel prices is particularly acute for airlines because it is their single biggest expense. … [Airlines] pump about 7,000 gallons into a Boeing 737 and as much as 60,000 gallons into the bigger 747 jet. … Each generation of aircraft is more efficient. At Northwest, the Airbus A330 long-range jets use 38 percent less fuel than the DC-10s they replaced, while the Airbus A319 medium-range planes are 27 percent more efficient than DC-9s. …
The New York Times, June 11, 2008
a. Is the price of fuel a fixed cost or a variable cost for an airline?
The price of fuel is a variable cost for an airline.
b. Explain how an increase in the price of fuel changes an airline’s total costs, average costs, and marginal cost.
An increase in the price of fuel raises an airline’s total cost, its average total cost, its average variable cost, and its marginal cost. It does not change the airline’s average fixed cost or total fixed cost.
c. Draw a graph to show the effects of an increase in the price of fuel on an airline’s TFC, TVC, AFC, AVC, and MC curves.

Figure 11.7 shows an airline’s TFC and TVC curves; Figure 11.8 shows an airline’s AFC, AVC, and MC curves. The increase in the price of fuel has no effect on the airlines fixed cost, so the TFC and AFC curves do not change. The increase in the price of fuel raises the firm’s variable costs and its total costs. As a result the firm’s TVC, AVC and MC curves shift upward as illustrated in the figures from the curves labeled “0”to the curves labeled “1”.
d. Explain how a technological advance that makes an airplane’s engines more fuel efficient changes an airline’s total product, marginal product, and average product.
This situation is an example of technological change that is embodied in capital. This change will allow the airline to produce more output—passenger miles—using fewer resources. Hence the airline’s total product, marginal product, and average product all increase. e. Draw a graph to illustrate the effects of more fuel efficient aircraft on an airline’s TP, MP, and AP curves.

Figure 11.9 shows the airline’s TP curves. The new engines shift the TP curve upward from TP0 to TP1. Figure 11.10 shows the airline’s MP and AP curves. These curves also shift upward as a result of the new fuel efficient engines.
f. Explain how a technological advance that makes an airplane’s engines more fuel efficient changes an airline’s average variable cost, marginal cost and average total cost.
The airline’s average variable cost and marginal cost both decrease. The new engines that use the new technology are presumably more expensive than the older, less fuel efficient engines. The engines are a fixed cost. So at lower levels of output the new average total cost is higher than the old average total cost while at larger levels of output the new average total cost is lower than the old average total cost. g. Draw a graph to illustrate how a technological advance that makes an airplane engine more fuel efficient changes an airline’s AVC, MC, and ATC curves.
Figure 11.11 illustrates these changes. The airline’s AVC and MC curves shift downward as indicated by the shift from the grey curves labeled “0” to the black curves labeled “1”. At lower levels of output the ATC curve shifts upward and at larger levels of output the ATC curve shifts downward.

8. The table shows the production function of Jackie’s Canoe Rides. Jackie’s pays $100 a day for each canoe it rents and $50 a day for each canoe operator it hires. Labor
(workers
per day) | Output
(rides per day) | | Plant 1 | Plant 2 | Plant 3 | Plant 4 | 10 | 20 | 40 | 55 | 65 | 20 | 40 | 60 | 75 | 85 | 30 | 65 | 75 | 90 | 100 | 40 | 75 | 85 | 100 | 110 | Canoes | 10 | 20 | 30 | 40 |
a. Graph the ATC curve for Plant 1 and Plant 2.
To find the average total cost for each plant, at the different levels of output add the cost of the workers, $50 per worker, and the fixed cost, the cost of the canoes, $100 per canoe. So for plant 1, the total cost for 20 rides is $1,500; for 40 rides is $2,000; and, for 65 rides is $2,500. The average total cost is calculated by dividing the total cost by the quantity of rides. These average total costs are plotted in Figure 11.12. (The average total cost curve for one plant, ATC1, is the same as the thicker curve through the first 4 points.)
b. On your graph in a, plot the ATC curve for Plant 3 and Plant 4.
These are drawn in Figure 11.12.
c. On Jackie’s LRAC curve, what is the average cost of producing 40, 75, and 85 rides a week?
The long-run average total cost curve is illustrated in Figure 11.12 as the thicker curve. It is comprised of the parts of the short-run average total cost curves that are the minimum average total cost for the different levels of output. From this curve, the average cost of producing 40 rides is $50; of producing 75 rides is $40; and the average cost of producing 85 rides is $47.06.
d. What is Jackie’s minimum efficient scale?
Jackie’s minimum efficient scale is the smallest quantity at which the long-run average cost is the lowest. Jackie’s minimum efficient scale is 65 canoe rides where, with one plant, the average total cost is $38.46.
e. Explain how Jackie’s uses its LRAC cost curve to decide how many canoe to rent.
Jackie’s will use its long-run average total cost curve by building the size of the plant that minimizes its long-run average cost at the level of output that Jackie’s expects to produce.
f. Does Jackie’s production function feature economies of scale or diseconomies of scale?
Jackie’s has both economies of scale for up to 65 canoe rides and then diseconomies of scale for more than 65 canoe rides.
9. Business Boot Camp At a footwear company called Caboots, sales rose from $160,000 in 2000 to $2.3 million in 2006. But in 2007 sales dipped to $1.5 million. Joey and Priscilla Sanchez, who run Caboots, blame the decline partly on a flood that damaged the firm’s office and sapped morale.
Based on a Fortune article, CNN, April 23, 2008 If the Sanchezes are correct in their assumptions and the prices of footwear didn’t change
a. Explain the effect of the flood on the total product curve and marginal product curve at Caboots.
The total product curve shifted downward as a result of the flood and sapped morale. That is, the factors of production produced less footwear in 2007 than in 2006. The downward shift in the total product curve decreased the marginal product so the marginal product curve also shifted downward.
b. Draw a graph to show the effect of the flood on the total product curve and marginal product curve at Caboots.

Figure 11.13 shows the downward shift in the total product curve and Figure 11.14 shows the downward shift in the marginal product curve. The flood and lack of morale shift the TP and MP curves downward from TP1 to TP2 and from MP1 to MP2.
10. No Need for Economies of Scale Illinois Tool Works Inc. might not seem like an incubator for innovation. The 93-year-old company manufactures a hodgepodge of mundane products, from automotive components and industrial fasteners to zip-strip closures for plastic bags … and dedicates production lines and resources to high-volume products. A line will run only those three or four products. … Runs are much longer and more efficient. By physically linking machines … they are able to eliminate work in process and storage areas … All the material handling and indirect costs are reduced.
Business Week, October 31, 2005
a. How would you expect “physically linking machines” to affect the firm’s short-run product curves and short-run average cost curves?
By “physically linking machines,” for any amount of labor the firm can produce more than before. The plant’s total product increases so the short-run total product curve shifts upward. The marginal product and average product curves also shift upward. As a result of the increase in the average product, the firm’s short-run average variable cost and average total cost both decrease so that the average variable cost curve and average total cost curve shift downward.

b. Draw a graph to show your predicted effects of “physically linking machines” on the firm’s short-run product curves and cost curves.

Figure 11.15 shows the effect of physically linking machines on Illinois Tool’s total product curve. The total product curve shifts upward from TP1 to TP2. Figure 11.16 shows the effects on Illinois Tool’s marginal product and average product curves. These curves shift upward from AP1 to AP2 for the average product of labor and from MP1 to MP2 for the marginal product of labor. Figure 11.17 shows the effect of physically linking machines on Illinois Tool’s cost curves. The costs fall so that all the cost curves shift downwards: The average variable cost curve shifts downward from AVC1 to AVC2, the average total cost curve shifts downward from ATC1 to ATC2, and the marginal cost curve shifts downward from MC1 to MC2.

c. Explain how concentrating “production lines and resources to high-volume products” can influence long-run average cost as the output rate increases.
By specializing in “high-volume products” the firm will be able to enjoy economies of scale. In other words, with this specialization, as the firm increases its production its long-run average costs will decline.

11. Grain Prices Go the Way of the Oil Price Every morning millions of Americans confront the latest trend in commodities markets at their kitchen table. … Rising prices for crops … have begun to drive up the cost of breakfast.
The Economist, July 21, 2007 Explain how the rising price of crops affects the average total cost and marginal cost of producing breakfast cereals.
When producing cereal, the cereal crops used are a variable factor of production. An increase in the price of these crops boosts the firms’ average total cost and the firms’ marginal cost of producing cereal.

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...only to the sectoral equity caps, entry routes and other relevant sectoral regulations. The issue of de-reservation had been a subject of animated debate within government for more than twenty years. The Approach to the Eleventh Five Year Plan noted the adverse implications of reservation of products for exclusive manufacture by the MSEs and recommended the policy of progressive de-reservation. To facilitate further investments for technological up-gradation and higher productivity in the micro and small enterprises, 654 items have been taken off the list of items reserved for exclusive manufacture by the manufacturing micro and small enterprises in the last few years – reducing it to 21 at present. This has helped the sector in enlarging the scale of operations and also paved the way for entry of larger enterprises in the manufacture of these products in keeping with the global standards. Credit/Finance Credit is one of the critical inputs for the promotion and development of the micro and small enterprises. Some of the features of existing credit policy for the MSEs are: Priority Sector Lending: Credit to the MSEs is part of the Priority Sector Lending Policy of the banks. For the public and private sector banks, 40% of the net bank credit (NBC) is earmarked for the Priority Sector. For the foreign banks, however, 32% of the NBC is earmarked for the Priority Sector, of which 10% is earmarked for the MSE sector. Any shortfall in...

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...* The Micro Dimension In this section, we will see more clearly the role of the smallest units which is the micro economic dimension. The previous section has described the macro and meso economic dimension. The macro level is the level of the individual in the organization. At the micro-level, also referred to as the local level, the research population typically is an individual in their social setting or a small group of individuals in a particular social context. Examples of micro-level levels of analysis include, but are not limited to, the following. * Alien, stateless person, asylum seeker, refugee * Person, citizen * Partnership, marriage * Families, household * Neighbourhood * Cases of maids abuse Malaysia is also not free from issues related to abusing the maids by employer. This crime is increasingly rising despite various actions committed by certain parties to overcome this crime. There are so many kinds of abuses made by the employers on their maid. Some of them have been beaten, raped, tortured with scalding water and nearly all have been treated like slaves and not paid for months or years of exhausting work, beaten, raped, tortured with scalding water and nearly all have been treated like slaves and not paid for months or years of exhausting work. Many still bear the scars, scalds and wounds inflicted on them for example like the former case of Nirmala Bonat. This can refer to The Star Online at http://thestar.com.my/news/story...

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...1. dcsvgeerhnIt is the annual flow of net income generated by an investment expressed as a percentage of the total investment 2. A normal rate of return is the rate of return on capital that is just sufficient to keep owners satisfied. 3. Marginal product versus average product Marginal product is the additional input that can be produced by hiring one more unit of a specific input, holding all other input quantities constant 4. Short run is the period where the firm is operating under a fixed scale (fixed factors) of production; and, new firms can neither enter nor exit an industry.mm Long run is the period for which there are no fixed factors of production. Hence firms increase or decrease the scale of their operations. New firms can enter and existing firms can exit the industry The difference between the short run and long run is the difference between day-to-day operations and long term strategic planning. 5. Increasing returns to scale means that a given percentage increased in the production of output requires a smaller percentage increase in the input. Hence, as output rises, average cost of production falls. This is what is called economies of scale: a reduction in cost per unit of output that follows from a larger scale of production. * The sources of economies of scale are mostly technological. However, some result from sheer size (buying in volume for lower prices) Constant returns to scales means that the quantitative relationship between...

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...Practice Questions 3 - Answers Fall 2003 Econ 101 1. In a market economy, who determines the price and quantity demanded of goods and services that are sold? a. Consumers b. The Government c. Producers d. Both consumers and producers e. None of the above Answer: d. In a market economy producers and consumers interact to determine what the equilibrium price and quantity will be. 2. If a good is “inferior” then a decrease in income will result in: a. an increase in the demand for the good b. a decrease in the demand for the good c. a higher market price d. a lower market price e. a lower demand for complementary goods Answer: a. If a good is inferior then it is negatively related to income, so if income decreases demand will increase. 3. Suppose a decrease in the price of good X leads to more of good Y being sold. Then X and Y are: a. Substitutes b. Complements c. Normal Goods d. Inferior Goods e. Unrelated Goods Answer: b. A decrease in the price of a complementary good will result in more of the complement being demanded and also increase the demand for the good itself. 4. The law of demand tells us that: a. when price falls, quantity demanded rises b. when price falls, quantity demanded falls c. when price rises, quantity demanded rises d. when price rises, quantity demanded falls e. both a and d satisfy the law of demand Answer: e. According to the law of demand, an increase...

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...CHAPTERS 7, 8, 9 (7) The Analysis OF Consumer Choice, (8) Production and Cost, (9) Competitive Markets for Goods and Services + Review CHAPTERS 7, 8, 9 (7) The Analysis OF Consumer Choice, (8) Production and Cost, (9) Competitive Markets for Goods and Services + Review The City College of New York Microeconomics The City College of New York Microeconomics Ramon E. Almendarez Date: 10/27/14 Dr. Jonatan Jelen Principles of Microeconomics Questions NP #4 Chapter 7 Li, a very careful maximizer of utility, consumes two services, going to the movies and bowling. She has arranged her consumption of the two activities so that the marginal utility of going to a movie is 20 and the marginal utility of going bowling is 10. The price of going to a movie is $10, and the price of going bowling is $5. Show that she is satisfying the requirement for utility maximization. Now show what happens when the price of going bowling rises to $10. The price of going to the movies is $10 The price of going to bowling is $5 And she only have $20 She can go one time to the movies and two times to bowling That is equal to 1 x 10 =10 and 2 x 5 = 10 total will be $20 In the case of the price of bowling rises to $10, she now only have the opportunity to go to the movies once and bowling to. Question NP #4 Chapter 8 The table below shows the total cost of cleaning classrooms: Classrooms cleaned per evening | 0 | 3 | 7 | 12 | 16 | 17 | Total cost | $100 | $200...

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...1.What is Panera Bread’s strategy? Which of the five generic competitive strategies discussed in Chapter 5 most closely fit the competitive approach that Panera Bread is taking? What type of competitive advantage is Panera Bread trying to achieve? 1. Panera Bread's strategy involves creating fresh baked artisan breads made with special attention to quality and detail along with its many other products with an inviting dining experience. The closest generic competitive strategy approach Panera Bread is taking is the broad differentiation strategy which seeks to differentiate the company’s product or service from rivals in ways that will appeal to a broad spectrum of buyers. This can supported by Panera management’s blueprint for attracting and retaining customers as stated in the case explains “Concept Essence that underpinned Panera’s strategy and embraced several themes that, taken together, acted to differentiate Panera from its competitors by offering an appealing selection of artisan breads, bagels, and pastry products that were handcrafted and baked daily at each café location. Serving high-quality food at prices that represented a good value. Developing a menu with sufficiently diverse offerings to enable Panera to draw customers from breakfast through the dinner hours each day. Designing bakery cafés that were esthetically pleasing and inviting. Offering patrons such a sufficiently satisfying dining experience that they were induced to return again and again.” From this...

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