In 2011, three firms were selling cellular phone service for a price of $40 per month in Pittsburgh, Pennsylvania. In 2012, five firms were selling cellular phone service for a price of $30 per month. Which effect best describes the likely decrease in profits experienced by each of the three original firms due only to the lower market price?

Question

Quizplus · Accepted Answer

The likely decrease in profits experienced by each of the three original firms is due only to the lower market price, which is a price effect. As more firms entered the market and offered lower prices, the original firms had to lower their prices to remain competitive, leading to a decrease in profits. This is not an oligopoly effect as it involves an increase in the number of competitors rather than a decrease. It is also not an output effect as there is no change in the quantity of the output. The market effect is too broad and does not specifically address the impact on profits. Therefore, the best choice is B, the price effect.

In 2011, Three Firms Were Selling Cellular Phone Service for a Price