Which of the following is a disadvantage of using a cost-based strategy in economics?

• A. It may lead to ignoring consumer preferences and demand.
• B. It guarantees market equilibrium.
• C. It always results in higher profits for firms.
• D. It ensures that prices reflect the value to consumers.

Answer: (A)

Verified step by step guidance

1. Understand what a cost-based strategy means: it involves setting prices primarily based on the costs of production plus a markup, rather than on consumer demand or preferences.
2. Recognize that a key disadvantage of this approach is that it may ignore consumer preferences and demand, which are crucial for determining how much consumers are willing to pay.
3. Recall that ignoring consumer preferences can lead to prices that do not reflect the value consumers place on the product, potentially resulting in lower sales or inefficiencies.
4. Note that cost-based pricing does not guarantee market equilibrium because equilibrium depends on the interaction of supply and demand, not just costs.
5. Understand that cost-based pricing does not always result in higher profits, as it may miss opportunities to charge higher prices when demand is strong or fail to attract customers when prices are too high.