Question

Suppose an oligopoly consists of two firms. Firm A lowers price and Firm B responds by lowering its price by the same amount. If average costs and industry output remain the same, which of the following will occur?

A. The profits of the two firms will decrease.
B. The profits of the two firms will remain the same.
C. The profits of the two firms will increase.
D. Barriers to entry will come tumbling down and new firms will enter.

Answer 1

A. The profits of the two firms will decrease.

Step-by-step explanation:

An oligopoly is when there are few large firms operating in an economy. There are usually significant barriers to entry of firms in an oligopoly.

If both firms reduce price and average cost stays the same, it indicates that there's no change in production and price has reduced. Profit would fall as a result.

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