Question

Larry and Susan work in an office near 2 Live Stew and Stew-topia, specialty stew restaurants on the same block. Larry notices that both places are charging only $2.00 for a bowl of stew, which is below the price of $4.00 that a bowl of stew typically costs elsewhere in the city.

Answer 1

Answer: B. to prove Stew-topia engaged in predatory pricing, you would need to prove that Stewtopia priced stew below average variable cost with the specific intention of driving 2 Live Stew out of business

Explanation:

Predatory pricing is the pricing of goods in such a way that it is so low that it is even below average variable cost. The logic being that in the Shortrun, if a firm cannot cover it's variable cost, it would have to shutdown.

Larry would therefore be correct in saying that to prove Stew-topia engaged in predatory pricing, it would need to proven that Stewtopia priced stew below average variable cost with the specific intention of driving 2 Live Stew out of business.