Multiple Choice
In the context of competitive markets, which of the following is an example of an operational plan?
73
views
3. The Market Forces of Supply and Demand
Competitive Markets
Multiple Choice
Which of the following is a likely outcome of a competitive rivalry based entirely on price cutting in a competitive market?
A
Firms will be able to sustain long-term economic profits.
B
Product differentiation will become the primary basis of competition.
C
Firms may experience lower profit margins as prices approach marginal cost.
D
Barriers to entry will increase significantly.
Verified step by step guidance1
Step 1: Understand the nature of a competitive market where firms are price takers and cannot influence the market price individually.
Step 2: Recognize that in such markets, price competition tends to drive prices down toward the marginal cost of production.
Step 3: Recall that when prices approach marginal cost, firms earn zero economic profit in the long run because any price below marginal cost would lead to losses.
Step 4: Analyze the impact of continuous price cutting, which reduces profit margins and makes it difficult for firms to sustain long-term economic profits.
Step 5: Conclude that the likely outcome of price-based competition in a competitive market is lower profit margins as prices approach marginal cost, rather than increased barriers to entry or product differentiation.
Related Videos
Related Practice
