Multiple Choice
In a competitive market, how does the entry of new coffeehouses typically affect the profits of existing coffeehouses?
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3. The Market Forces of Supply and Demand
Competitive Markets
Multiple Choice
Which of the following is a reason that your company might not want to increase its market share in a competitive market?
A
Increasing market share always guarantees higher profits regardless of costs.
B
Increasing market share may lead to lower overall profits if prices must be reduced to attract more customers.
C
Increasing market share has no impact on the company's costs or pricing strategies.
D
Increasing market share eliminates all competition from the market.
Verified step by step guidance1
Step 1: Understand the concept of market share in a competitive market. Market share refers to the portion of total sales in the market that a company captures. Increasing market share means selling more relative to competitors.
Step 2: Recognize that in a perfectly competitive market, firms are price takers, meaning they cannot set prices above the market equilibrium without losing customers. To increase market share, a firm might need to lower its price.
Step 3: Analyze the relationship between price, quantity sold, and total profit. Even if quantity sold increases, lowering the price can reduce the profit margin per unit. Total profit is calculated as \(\text{Profit} = (\text{Price} - \text{Cost}) \times \text{Quantity}\).
Step 4: Consider the cost structure. If costs remain constant or increase with higher output, and the price reduction is significant, the overall profit may decrease despite higher sales volume.
Step 5: Conclude that increasing market share does not always lead to higher profits because the necessary price reductions to attract more customers can reduce profit margins, potentially lowering overall profits.
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