Suppose Two Firms Produce Close Substitutes Such That Reducing the Price

question 39

Multiple Choice

Suppose two firms produce close substitutes such that reducing the price of one product reduces the quantity demanded of the other. If those two firms merge

• A) they can earn higher profits by continuing to sell both products if the profit gained from increased sales of one product are greater than the lost profits from reduced sales of the other product.
• B) they will eliminate the less profitable product and sell only one.
• C) they will raise prices on both products.
• D) they will be unable to earn higher profits because the two products will compete against each other.

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Definitions:

Capacity to Contract

refers to the legal ability of a person to enter into a binding agreement.

Ward's Capacity

The legal competence or ability of a ward (a person under the protection of a legal guardian) to act in their own interests.

Guardian with Full Powers

An individual appointed by the court to have complete responsibility for the personal and/or financial matters of a minor or legally incapacitated person.

Voidable Policy

A contract or insurance policy that can be declared invalid by one of the participating parties due to certain conditions not being met or misrepresented.