Chapter 58, Problem 2MCQ

To determine

The correct option that defines true condition about perfectly competitive firm.

Answer to Problem 2MCQ

Option a is correct.

Explanation of Solution

Explanation for correct option:

a.

Perfectly competitive firm has a horizontal demand curve as these firms are the price takers. At the given price, firm can sell as many units as they want. Therefore, option a is correct.

Explanation for incorrect options:

b.

If any of the firm charges higher prices than the prices charged by other firms they it won’t be able to sell products in the market. This is because these firms sell identical products in the market. Therefore, option b is incorrect.

c.

If prices are exceeded by marginal revenue then firm will not earn even normal profit. Therefore, option c is also incorrect.

d.

Marginal revenue curve of the perfectly competitive firm is sloping downward. It is different from the demand curve. Therefore, option d is incorrect.

e.

To earn maximum profit, the firm sets its price equal to marginal cost. Therefore, option e is incorrect.

Economics Concept Introduction

Perfect Competition: In perfect competition, firms are the price takers where average total cost (ATC) is minimum to the point at which MC curve cuts the MR curve.