Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Both firms make higher profits than before
B
Both firms make zero profits
C
Only Firm A makes a profit
D
Only Firm B makes a profit
Understanding the Answer
Let's break down why this is correct
Answer
In a market where two firms are competing on price, if both Firm A and Firm B decide to lower their prices, they are likely to experience reduced profits. This happens because lower prices usually mean each firm earns less money for every product sold. For example, if both firms sell a product for $10 and they lower their price to $8, they will earn less per sale. Additionally, customers might switch between the two firms, leading them to compete even more aggressively, which can drive prices down further. Ultimately, while they might attract more customers, the overall profit for both firms may decline because of the lower prices.
Detailed Explanation
When both firms lower their prices, they attract more customers, but their profits drop. Other options are incorrect because Some might think that lowering prices leads to higher profits; It's a common mistake to think only one firm can profit.
Key Concepts
Payoff Matrix
Topic
Game Theory and Oligopolies
Difficulty
easy level question
Cognitive Level
understand
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