When a recession occurs, how are oligopolistic firms most likely to respond in terms of pricing and output decisions?

• A. They will always increase prices to offset lower demand.
• B. They will expand output to take advantage of increased consumer spending.
• C. They may engage in more aggressive price competition to maintain market share.
• D. They will ignore market changes and keep prices and output constant.

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the nature of oligopolistic markets, where a few firms dominate and are interdependent in their pricing and output decisions.
2. Step 2: Recognize that during a recession, overall market demand decreases, which puts pressure on firms to adjust their strategies to maintain profitability and market share.
3. Step 3: Analyze why firms might not simply increase prices, as higher prices could further reduce demand, nor expand output, since consumer spending is down.
4. Step 4: Consider that oligopolistic firms often respond to decreased demand by engaging in more aggressive price competition to attract or retain customers, rather than ignoring market changes.
5. Step 5: Conclude that the most likely response is increased price competition, as firms try to maintain their market share in a shrinking market.