Future Business Leader Achievments (FBLA) Economics Practice Exam

How do businesses typically respond when they notice a significant profit in an industry?

1. They remain indifferent to market signals

2. They often enter that industry

3. They price their products higher

4. They diversify into unrelated markets

The correct answer is: They often enter that industry

When businesses observe significant profits in an industry, they often perceive this as a compelling opportunity for growth and increased revenue. The presence of high profits signals that there is strong demand for the products or services within that industry. As a result, many businesses are motivated to enter the industry in order to capitalize on the lucrative market conditions. Entering a profitable industry not only allows new competitors to share in the existing profits but can also stimulate innovation and improve overall market offerings. This response is grounded in the principle of market dynamics, where potential earnings attract new entrants, leading to increased competition. The other response options do not align with the typical business behavior in such scenarios. Businesses do not generally remain indifferent to market signals since awareness of profits serves as a vital indicator of opportunity. Pricing their products higher without a strategic reason might lead to losing customers, as businesses often strive to balance profitability with competitive pricing. Similarly, while diversifying into unrelated markets can be a strategy for some companies, it is less common as an immediate response to high profits in a specific industry. Instead, firms are more likely to focus their efforts on entering the industry where the profits are evident.