When managers of firms in a competitive market observe falling profits,they are likely to infer that the market is characterized by

Question

Quizplus · Accepted Answer

When managers observe falling profits in a competitive market, it is likely because new firms have entered the market, increasing competition and reducing profit margins for existing firms. Therefore, option C (the entry of new firms) is the best choice. Options A (a violation of conventional market forces) and B (over-investment) are unlikely explanations for falling profits in a competitive market. Option D (too few firms in the market) would lead to higher profits, not lower profits.

When Managers of Firms in a Competitive Market Observe Falling