When strategic interactions are important to pricing and production decisions, a typical firm will
A)set the price of its product equal to marginal cost.
B)consider how competing firms might respond to its actions.
C)generally operate as if it is a monopolist.
D)consider exiting the market.

Question

Quizplus · Accepted Answer

When strategic interactions are important, a typical firm will consider how competing firms might respond to its actions in order to make pricing and production decisions that maximize its profits. A firm cannot assume that it operates in isolation and must take into account the actions of its competitors to make effective decisions. Setting the price of its product equal to marginal cost might not be the best strategy when competing firms are setting different prices. Operating as if it is a monopolist might not be realistic if the market is competitive. Exiting the market is not always the best decision since the firm might have opportunities to improve its competitive position.

When Strategic Interactions Are Important to Pricing and Production Decisions