Problem 141 Barbie Dolls and Accessories Why might Mattel se

Problem 14-1 Barbie Dolls and Accessories: Why might Mattel set a much lower contribution margin on its Barbie dolls than on the accessories for the dolls?

Solution

Adding accessories is like adding crown to jewel. It is not demanded much as like barbies. Hence, few people produce it. In addition to produce that the producer of accessories face less competition. Hence, due to tending toward monopoly power it has a positive Lerner index. Thus, contribution margin may set higher by raising price level. On the otherhand, market for barbies face perfect competition that faces perfectly elastic individual demand. Hence, the cannot set higher price in order to forgoe a large market share. Hence, in case of barbies contribution margin is lower.