When an individual firm in a competitive market decreases its production, it is likely that the...

When an individual firm in a competitive market decreases its production, it is likely that the market price will rise. True or False? Explain

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Expert Solution

Hence option c is the correct answer.

Since in the perfectly competitive firm, there are large number of buyers and sellers and they sell identical product and price is determined by industry and not by the firm. So any firm or any buyers can buy or sell any quantity of goods at the market price. It means there is no effect of the individual demand or supply of goods on the market price. It means production decisions cannot affect the market price. There is perfect information about the product to the buyers and sellers.

The profit-maximizing condition of perfectly competitive firm is

P=MC

MR and Price are same in the perfect competition.

Corresponding to this condition, quantity is Determined.

Since an individual firm is a price taker in the perfectly competitive industry, therefore with the decrease in the production of this firm will not affect the industry supply because there are many firms. Hence it can be said that when an individual firm in a competitive market decreases its production, the market price will be unchanged.

Hence the given statement is false.

Rahul Sunny answered 1 year ago

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