Which of the following is a likely outcome of a competitive rivalry based entirely on price cutting in a competitive market?

• A. Firms will be able to sustain long-term economic profits.
• B. Product differentiation will become the primary basis of competition.
• C. Firms may experience lower profit margins as prices approach marginal cost.
• D. Barriers to entry will increase significantly.

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the nature of a competitive market where firms are price takers and cannot influence the market price individually.
2. Step 2: Recognize that in such markets, price competition tends to drive prices down toward the marginal cost of production.
3. Step 3: Recall that when prices approach marginal cost, firms earn zero economic profit in the long run because any price below marginal cost would lead to losses.
4. Step 4: Analyze the impact of continuous price cutting, which reduces profit margins and makes it difficult for firms to sustain long-term economic profits.
5. Step 5: Conclude that the likely outcome of price-based competition in a competitive market is lower profit margins as prices approach marginal cost, rather than increased barriers to entry or product differentiation.