Final answer:
The correct answer is that in a market without price discrimination, when a firm lowers its price, all customers pay the lower price. This can lead to temporary economic profits which attract new competitors, eventually driving prices down to a zero-profit level.
Step-by-step explanation:
In a market without price discrimination, the correct answer is B: when the firm lowers the price to attract new customers, all customers pay the lower price. This situation leads to certain market dynamics. Initially, if a firm sets a price above the average cost curve, it will earn economic profits, attracting new firms to the market. These new entries increase supply, shifting the market supply curve to the right, which eventually drives the price down. If this process continues, economic profits will eventually fall for both new and existing firms, stopping only when the market price aligns with the zero-profit level, where firms are earning no economic profits.
A higher market price will increase total revenue per quantity sold, while a lower market price will decrease it. In a scenario where the market price drops so low that total revenue is below total costs at every output level, firms will incur losses. A profit-maximizing firm will seek to minimize losses by choosing the quantity of output where the gap between total revenues and total costs is smallest.