What is a key factor that determines a firm’s profitability?

A. differentiation of a firm’s product from other products

B. factors affecting a firm’s entire market

C. a firm’s average cost of production relative to that of competing firms

D. chance events

E. all of the above

Economic theory suggests countries benefit from international trade by producing more of those goods and services for which they have a comparative advantage (and less of that for which a country does not have a comparative advantage). However, countries rarely specialize completely, why?

Even with international trade, countries rarely specialize completely because

A. all goods and services can be traded internationally

B. some countries would lose as a result of free trade

C. consumers in different countries have homogeneous tastes

D. some countries do not have an absolute advantage in producing anything

E. production of most goods involves increasing opportunity costs.

Answer

1..)

The right answer is: (E)

All of these factors determine firm profitability. Products differentiation, factors affecting the entire market, the average cost of production relative to other firms are major factors that affect the profitability of firms. The average cost of production relative to other firms is the most critical factor.

2)

The right answer is: (E)

There are many reasons for the country not going for complete specialization:

  • All goods and services are not traded internationally.
  • Tastes differ
  • The increasing opportunity cost of goods involved.

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