In an industry where the average willingness to pay is $200 and average cost is $150, a cost-leader has a cost of $120. What is the minimum willingness to pay for the cost-leader to achieve higher value creation than the typical firm?

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BlackTom AI · Accepted Answer

First, restating the scenario helps frame the calculation: the industry average WTP is 200 and average cost is 150, giving a typical firm value creation of 200 − 150 = 50. The cost-leader has a cost of 120, so its value creation is WTP_cost − 120. To achieve higher value creation than the typical firm, we require WTP_cost − 120 > 50, which simplifies to WTP_cost > 170. Now, evaluate each option:

Option 1: 170. If the cost-leader’s WTP were exactly 170, its value creation would be 170 − 120 = 50, which equals the typical firm’s value creation but does not exceed it. Therefore, 170 is not sufficient for higher value creation.

Option 2: greater than 200. While a WTP above 200 would certainly exceed the 50 value threshold and yield higher value creation, this option specifies a range that is more restrictive than necessary. The minimum to surpass 50 is just any amount over 170, not necessarily over 200.

Option 3: 50. A WTP of 50 is below both the cost-leader’s cost (120) and the typical firm’s WTP minus cost outcome of 50. This would produce negative or zero value creation, clearly not sufficient.

Option 4: Greater than 170. This matches the derived requirement WTP_cost > 170, meaning the cost-leader must charge a willingness to pay that exceeds 170 to create more value than the typical firm.

In summary, the threshold calculation shows that only options implying a WTP strictly above 170 meet the criterion for higher value creation than the typical firm, while 170 exactly and the other lower or misaligned values do not.

In an industry where the average willingness to pay is $200 and average cost is $150, a cost-leader has a cost of $120. What is the minimum willingness to pay for the cost-leader to achieve higher value creation than the typical firm?

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