Multiple Choice
In a competitive market for airline fares, how does increased competition among airlines typically affect the prices that consumers pay for tickets?
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3. The Market Forces of Supply and Demand
Competitive Markets
Multiple Choice
Which of the following best describes the author's claim regarding price competition among products in competitive markets?
A
Firms in competitive markets can set prices above the market equilibrium to maximize profits.
B
Price competition is irrelevant in competitive markets because all products are differentiated.
C
Competitive markets allow firms to collude and set prices collectively.
D
Firms in competitive markets must accept the market price and cannot influence it through their own pricing decisions.
Verified step by step guidance1
Understand the nature of competitive markets: In perfectly competitive markets, there are many firms selling identical (homogeneous) products, and no single firm has the power to influence the market price.
Recall the concept of price takers: Firms in competitive markets are price takers, meaning they must accept the market equilibrium price determined by overall supply and demand, rather than setting their own prices.
Analyze the options given: Evaluate each statement in light of the characteristics of competitive markets, focusing on whether firms can set prices above equilibrium, whether products are differentiated, and whether firms can collude.
Identify the correct claim: The statement that firms must accept the market price and cannot influence it through their own pricing decisions aligns with the fundamental principle of price-taking behavior in competitive markets.
Conclude that price competition in competitive markets occurs through quantities sold at the market price, not through individual firms setting prices, which supports the correct answer.
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