Which of the following best describes the "guiding function" of competitive prices?
A)Profitable industries tend to contract and unprofitable industries tend to expand.
B)The market system will always generate economic profits for firms which use the least costly production technology.
C)The market system can negotiate reallocations of resources which are appropriate to changes in consumer tastes, technology, and resource supplies.
D)When prices are in equilibrium, product shortages or surpluses cannot occur.

Question

Quizplus · Accepted Answer

The guiding function of competitive prices refers to how the market system responds to changes in consumer tastes, technology, and resource supplies. Competitive prices help to allocate resources in a way that reflects the needs and wants of consumers, as well as the availability and cost of resources. As prices fluctuate, industries respond to these signals by expanding or contracting production, which helps to ensure that resources are used efficiently and that consumer demand is met. Choice A is incorrect because profitable industries may continue to expand if they have a comparative advantage or if entry into the industry is easy. Choice B is incorrect because economic profits will only persist if there are barriers to entry preventing other firms from adopting the same production technology. Choice D is incorrect because prices in equilibrium do not guarantee that shortages or surpluses will not occur, as external factors can still affect supply and demand.

Which of the Following Best Describes the "Guiding Function" of Competitive