In the foreign exchange market, people and firms exchange one currency to purchase another currency.

In early 2007, Pioneer and JVC, two Japanese electronics firms, each announced that their profits were going to be lower than expected because they both had to cut prices for LCD and plasma television sets

Which of the following could explain why these firms did not simply raise their prices and increase their profits? A) The firms are still making profits, just not as high as expected so there is room to lower prices until one can force the other out of business. B) The move to cut prices is probably just a temporary one to gain market share. In the long run the firms will raise prices and be able to increase their profits. C) Most likely, intense competition between these two major producers probably pushed prices down. Thereafter, each feared that it would lose its customers to the other if it raised its prices. D) In perfect competition, prices are determined by the market and firms will keep lowering prices until there are no profits to be earned.

Economic models do not have to completely describe every aspect of the economy in order to be useful

a. True b. False