Question

7. Perfectly competitive firms are price takers because _____

a. firms earn high profits by charging different prices to different groups of consumers.

b. one firm determines the market price and all other firms accept this price.

c. firms must accept any price that consumers offer them.

d. firms charge the price that government determines.

e. each firm is too small compared to the market to be able to affect price.

Answer 1

Answer 7

In a perfect competitive market there are large number of firms and each of them selling identical goods.As there are large number of firms and each firm is selling identical(or homogeneous) goods they cannot charge higher price because this will shift the demand from that producer to other and that firm will end up selling 0 unit and because of this each firm has very small or negligible market share and also negligible market power(because price charge by perfecct competitive firm is P = MC where P = price and MC = Marginal cost).

This means that each perfect competitive firm is too small to effect market price and because of this each firm charges price determined by the market i.e. price at which we have Demand = Supply. This non ability of a firm to affect price is what make them price takers. So, option (e) is the correct answer.

Hence, the correct answer is (e) each firm is too small compared to the market to be able to affect price.