Which of the following statements about competition and rivalry in competitive markets is true?

• A. Rivalry in competitive markets causes firms to restrict output to increase prices.
• B. Competitive markets discourage innovation due to excessive rivalry.
• C. In competitive markets, rivalry among firms leads to lower prices and greater efficiency.
• D. Competition in competitive markets always results in monopolies forming over time.

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the concept of competition in competitive markets. Competition means multiple firms are trying to attract consumers by offering better prices, quality, or innovation.
2. Step 2: Analyze the effect of rivalry on output and prices. In competitive markets, firms do not restrict output to increase prices; instead, they tend to increase output to gain market share, which usually lowers prices.
3. Step 3: Consider the impact of competition on innovation. Competitive markets often encourage innovation because firms seek to differentiate themselves and attract more customers, rather than discourage it.
4. Step 4: Evaluate the claim about monopolies forming due to competition. Competitive markets are characterized by many firms and free entry and exit, which prevents monopolies from forming over time.
5. Step 5: Conclude that the true statement is that rivalry in competitive markets leads to lower prices and greater efficiency, as firms compete to offer better value to consumers.