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Chapter 3: Problem 3

If a business is currently earning high profits producing lamps, what are other firms that observe this fact likely to do? Explain your answer.

Short Answer

Expert verified
If a business is earning high profits producing lamps, other firms that observe this fact are likely to either enter into the same market or increase their production of lamps, seeking to make similar high profits. This is due to the competitive nature of market environments, where firms aim to capitalize on the most profitable opportunities.

Step by step solution

01

Understand The Context

The first step is to comprehend that a business is making a higher profit by manufacturing lamps. This could be due to several reasons such as high quality produce, low competition or high demand.
02

Predict The Reaction of Other Firms

In a market scenario, if other firms observe one business making a high profit, they are likely to respond. They would evaluate the potential for similarly high profits and consider entering the lamp production market or increasing their existing production of lamps.
03

Explaining The Reaction

The reason other firms might increase lamp production or change their production focus to lamps is because they wish to also gain from the high-profit situation. This is a manifestation of competitive behavior in the market, where businesses are always searching for the most profitable opportunities.

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