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In: Economics

The market demand curve of a particular good is downward-sloping. Based on this information, which of...

The market demand curve of a particular good is downward-sloping. Based on this information, which of the following statements is correct regarding a price-taking firm producing that good? (Justify the answer)

a) The demand curve faced by the firm is downward sloping

b) The firm chooses the price that equals its marginal cost

c) The firm chooses its output such that the marginal cost equals the price

d) A price-taking firm cannot be profit-maximising

Solutions

Expert Solution

Answer : A firm chooses the price that equals the marginal cost.

In a perfectly competitive market, firms are price takers because all the goods sold in this market are homogeneous and perfect substitutes. A price charged by the firm above the market price will lose all its customers and customers will switch to other producers. So the producer is a price taker. The firms will inturn charge a price equal to its marginal cost. It means that when a firm produces an extra unit, it will charge a price equal to the cost of adding a factor inputs to produce that additional unit.

Rahul Sunny answered 2 years ago
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