There is much evidence to suggest that airlines are more likely to match price cuts than price increases. Which of the following best explains this evidence?
A) No one airline wants to be the first to renege on a tacit collusive agreement in which all airlines implicitly agree to match price cuts but not price increases.
B) An airline fears that if it does not match a price cut, its sales may fall considerably but if it does not match a price increase, it will be able to attract customers away from its rivals.
C) The law of demand which states that an increase in price leads to a decrease in quantity demanded.
D) Airlines have different costs of production and therefore it is more difficult to agree on a price increase than on a price decrease.
Question 2
If, for a given output level, a perfectly competitive firm's price is less than its average variable cost, the firm
A) is earning a profit. B) should increase output.
C) should increase price. D) should shut down.
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