Question

A perfectly competitive firm Select one: a. picks the price that leads to the largest market share. b. chooses its price to maximize profit. c. takes its price as given by market conditions. d. sets its price to undercut other firms selling similar products.

Answer 1

Answer:

The answer is C. takes its price as given by market conditions.

Explanation:

In perfect competition, there are:

1. large number of buyers and sellers that no buyer or seller can influence the price of commodity.

2. The commodity in the market are identical (homogeneous). So if a seller increases its own price, consumers will switch to the next seller.

3. There are few or no barriers to entry and exit. Entry and exit cost is low.

4. The bargaining power of seller is low while that of buyer is seller.

So what determines the price?

Price in perfect competitive market is determined by the demand and supply in the market. The demand curve faced by a firm here is horizontal meaning, meaning at high price, the firm cannot sell anything.

So price is determined at the point where demand curve and supply curve intersects.

In at the attached file Po is the prevailing market price and Qo is the quantity demanded at price Po.

Sellers or firms in this market are price takers