Question

A competitive firm observing a rival firm raising its price​ will:

A. lower its price and capture the entire market.

B.increase its profits by also raising its price.

C. increase production because it knows that consumers will substitute toward its relatively less expensive product.

D. ignore its​ rival's action.

Answer 1

Ans. D. ignore its rival's action.

A competitive firm will ignore it's rival's action as every firm charge the optimum price that decided by the industry for the same good that every firm sell. If a firm raises the price to earn more profit then other firms will not follow the particular firm because every firm sell the same good in the competitive market and consumer can easily shift to the other firm to buy same good and similarly if a firm charge the lower price than the optimum price in the market then other firms will not follow the same firm cause it affects the cost of the firm and it would lead to the exit from the market. therefore every firm ignores what other firm's action is because everyone has full information about the market condition and firms will earn a profit when they charge the optimum price that decided by the demand and supply forces in the market.