In an industry in which a small number of firms compete, firms will typically:

• A. set prices solely based on marginal cost
• B. ignore the pricing strategies of other firms
• C. act as price takers in the market
• D. consider the actions and reactions of rival firms when making decisions

Answer: (D)

Verified step by step guidance

1. Understand the market structure described: a small number of firms competing indicates an oligopoly, where each firm's decisions affect and are affected by the others.
2. Recall that in an oligopoly, firms do not act as price takers because their pricing decisions influence the market and the behavior of rival firms.
3. Recognize that firms in such markets typically do not set prices solely based on marginal cost, as strategic considerations about competitors' reactions are crucial.
4. Note that ignoring the pricing strategies of other firms is not optimal in an oligopoly because firms are interdependent and must anticipate rivals' responses.
5. Conclude that the correct behavior is for firms to consider the actions and reactions of rival firms when making pricing and output decisions, reflecting strategic interdependence.