Adam Smith suggests that increased competition will allow prices to be kept:

• A. determined solely by government intervention
• B. significantly above the cost of production
• C. unpredictable and highly volatile
• D. close to the cost of production

Answer: (D)

Verified step by step guidance

1. Understand the concept of competition in microeconomics: Increased competition among firms typically drives prices toward the cost of production because firms cannot sustain prices significantly above costs without losing customers to competitors.
2. Recall Adam Smith's idea of the 'invisible hand,' which suggests that in a competitive market, self-interested behavior leads to efficient outcomes, including prices that reflect production costs.
3. Recognize that government intervention can influence prices, but Adam Smith's argument emphasizes that in a competitive market, prices are determined by market forces rather than solely by government control.
4. Note that prices significantly above the cost of production are usually unsustainable in a competitive market because new entrants will be attracted by the high profits, increasing supply and pushing prices down.
5. Conclude that increased competition tends to keep prices close to the cost of production, ensuring that resources are allocated efficiently and consumers pay prices reflecting the true cost of goods.