What is an incorrect statement regarding physical switches and virtual switches?

The statement that a virtual switch can operate on VLAN tags is accurate, and therefore, the selection made is not the incorrect statement. Virtual switches are designed to manage traffic between virtual machines (VMs) on a physical host and can indeed work with Virtual Local Area Network (VLAN) tags to segment network traffic. This ability allows virtual networks to be organized similarly to physical networks, enhancing flexibility and efficiency in traffic management.

Each of the other statements captures a characteristic of virtual switches correctly. A virtual switch does run on a physical server, relying on the underlying physical resources to function. Additionally, while the capacity to incorporate VLAN tags is a strength, virtual switches can also be configured with Layer 3 interfaces in many cases, enabling them to perform routing operations. Lastly, virtual switches need to utilize hardware resources since they operate as software entities within the physical server's environment, which implies that they compete for CPU and memory resources alongside other applications and virtual machines.