Final answer:
The correct answer is option B. Penetration.
Step-by-step explanation:
The pricing strategy described in the student's question, where products and services are priced low in the long term by making fundamental changes is known as penetration pricing. This strategy is different from predatory pricing, which is when an existing firm lowers prices very low to drive a new competitor out of the market before raising prices again. Predatory pricing is often challenging to identify, especially if a firm lowers prices to match a competitor's pricing, leading to confusion about whether it's simply market competition or a strategic move to eliminate competition.
Calculating whether a price cut is below average variable cost can serve as evidence for predatory pricing. On the other hand, menu costs refer to the costs associated with changing prices, which may include analyzing market conditions, updating sales materials, and managing customer relationships.