In a market system, firms are subject to business risk primarily because:

• A. prices are fixed by the government
• B. resources are allocated solely by tradition
• C. profits and losses depend on consumer demand and competition
• D. government guarantees all firms a minimum profit

Answer: (C)

Verified step by step guidance

1. Understand the concept of business risk: Business risk refers to the uncertainty firms face regarding their profits due to factors like changes in consumer demand, competition, and market conditions.
2. Analyze each option in the context of a market system: In a market system, prices are generally determined by supply and demand, not fixed by the government, so fixed prices do not typically cause business risk.
3. Consider the role of resource allocation: If resources were allocated solely by tradition, this would limit flexibility but is not the primary source of business risk in a market system.
4. Recognize that government guarantees of minimum profit would reduce business risk, but such guarantees are not characteristic of a market system.
5. Conclude that the main source of business risk in a market system is that profits and losses depend on consumer demand and competition, which are inherently uncertain and variable.