Which of the following questions is most relevant when investigating the level of competition in a competitive market?

• A. How much do consumers spend on advertising?
• B. How many firms are operating in the market?
• C. What is the total revenue of the largest firm?
• D. What is the government’s tax rate on profits?

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the concept of a competitive market. A competitive market is characterized by many firms selling identical or very similar products, with no single firm able to influence the market price significantly.
2. Step 2: Identify the key factors that determine the level of competition. These include the number of firms in the market, the ease of entry and exit, and the degree of product differentiation.
3. Step 3: Analyze each question in the problem to see which relates directly to competition. For example, 'How many firms are operating in the market?' directly addresses the number of competitors, which is central to competition.
4. Step 4: Recognize that questions about consumer advertising spending, total revenue of the largest firm, or government tax rates on profits do not directly measure the level of competition but rather focus on other aspects like marketing, firm size, or regulation.
5. Step 5: Conclude that the most relevant question for investigating the level of competition is the one that asks about the number of firms operating in the market, as this directly reflects market structure and competitive intensity.