Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Firms can set prices above market equilibrium to increase revenues.
B
Firms must accept market prices as given and cannot influence them.
C
Firms with pricing power can dictate market prices and eliminate competition.
D
Firms will always lose customers if they increase prices.
Understanding the Answer
Let's break down why this is correct
Answer
Pricing power refers to a firm's ability to set its prices above the market level without losing all its customers. In a competitive market, firms typically have little pricing power because many competitors offer similar products. This means that if a firm raises its prices too much, customers will likely switch to a competitor with lower prices. For example, if a coffee shop tries to charge $5 for a cup of coffee when other shops sell it for $3, many customers will choose the cheaper option. Therefore, in highly competitive markets, firms must be careful with pricing strategies to maximize profits, as they cannot easily increase prices without risking a loss of customers.
Detailed Explanation
In a competitive market, firms cannot change prices. Other options are incorrect because Some might think firms can raise prices to make more money; It's a common belief that some firms can control prices and push out others.
Key Concepts
pricing power
Topic
Market Adjustments and Firm Behavior
Difficulty
easy level question
Cognitive Level
understand
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