The Department of Justice and the Federal Trade Commission must define the relevant market when determining whether to allow a merger. How do economists identify the relevant market? The relevant market has been identified if A. a technological advance results in lower prices; otherwise, the market is too broadbroad. B. a price increase results in higher profits; otherwise, the market is too narrow. C. an increase in output results in a decrease in average costs; otherwise, the market is too narrownarrow. D. an increase in profits results in new firms entering; otherwise, the market is too broadbroad. E. a price increase results in lower sales; otherwise, the market is too narrownarrow.

Question

Business

Daphne Baxter

22 March, 07:20

The Department of Justice and the Federal Trade Commission must define the relevant market when determining whether to allow a merger. How do economists identify the relevant market? The relevant market has been identified if A. a technological advance results in lower prices; otherwise, the market is too broadbroad. B. a price increase results in higher profits; otherwise, the market is too narrow. C. an increase in output results in a decrease in average costs; otherwise, the market is too narrownarrow. D. an increase in profits results in new firms entering; otherwise, the market is too broadbroad. E. a price increase results in lower sales; otherwise, the market is too narrownarrow.

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Answers (1)

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Will Skinner · Answer 1

The correct answer is letter "B": a price increase results in higher profits; otherwise, the market is too narrow.

Explanation:

When firms are interested in acquisitions or mergers they have to determine if the target company is part of a relevant market. The term refers to the competitive conditions that offer the economy where the target company is located. The relevant market also considers the type of product or service the target company offers.

Relevant markets optimal for mergers are those where an increase in prices generates more revenue for firms. If there are too many competitors offering undifferentiated products, the market will not allow organizations to profit from price increases. Those markets, then, are too narrow.