Question

While Aros Inc. incurs a cost of $20 for a pair of shoes, Shoes Cult Inc., its competitor, manufactures a pair of shoes at $22. Both the companies are able to sell their shoes for a maximum of $30 per pair. Which of the following statements is NOT true in this scenario?
A. Aros is a cost leader when compared to Shoes Cult.
B. Both Aros and Shoes Cult have achieved differentiation parity.
C. Aros has created a greater economic value than Shoes Cult.
D. Shoes Cult has a competitive advantage over Aros.

Answer 1

Answer:

D. Shoes Cult has a competitive advantage over Aros.

Explanation:

Competitive advantage is defined as the advantage an entity has when they are able to produce a good at cost that is lower than the cost incurred by other parties in the same industry. This results in higher profit margins for businesses that have low production cost.

In this scenario Aros produces shoes for $20 while Shoes Cult produces the same shoes for $22. They both have the same price ceiling of $30.

Aros has competitive advantage over Shoes Cult because they produce at a lower cost and make more profit than Shoes Cult.

Assume they both sell at the maximum price. Profit for Aros= 30- 20=$10

Profit for Shoes Cult= 30-22= $8