Read the passage given below and answer the following questionsFirms are said to be in perfect competition when the following conditions occur: (1) many firms produce identical products; (2) many buyers are available to buy the product, and many sellers are available to sell the product; (3) sellers
Read the passage given below and answer the following questions
Firms are said to be in perfect competition when the following conditions occur: (1) many firms produce identical products; (2) many buyers are available to buy the product, and many sellers are available to sell the product; (3) sellers and buyers have all relevant information to make rational decisions about the product being bought and sold; and (4) firms can enter and leave the market without any restrictions?in other words, there is free entry and exit into and out of the market.
A perfectly competitive firm is known as a price taker, because the pressure of competing firms forces them to accept the prevailing equilibrium price in the market. If a firm in a perfectly competitive market raises the price of its product by so much as a penny, it will lose all of its sales to competitors. When a wheat grower, wants to know what the going price of wheat is, he or she has to go to the computer or listen to the radio to check. The market price is determined solely by supply and demand in the entire market and not the individual farmer. Also, a perfectly competitive firm must be a very small player in the overall market, so that it can increase or decrease output without noticeably affecting the overall quantity supplied and price in the market.
A perfectly competitive market is a hypothetical extreme; however, producers in a number of industries do face many competitor firms selling highly similar goods, in which case they must often act as price takers. Agricultural markets are often used as an example. The same crops grown by different farmers are largely interchangeable. According to the United States Department of Agriculture monthly reports, in 2015, U.S. corn farmers received an average price of $6.00 per bushel and wheat farmers received an average price of $6.00 per bushel. A corn farmer who attempted to sell at $7.00 per bushel, or a wheat grower who attempted to sell for $8.00 per bushel, would not have found any buyers. A perfectly competitive firm will not sell below the equilibrium price either. Why should they when they can sell all they want at the higher price?
Source: Principles of Economics, Download for free at http://cnx.org/content/col11613/latest.
According to the passage, why is a perfectly competitive firm a price taker?
1). A perfectly competitive firm is a price taker as it cannot afford to sell its products below the market price
2). A perfectly competitive firm is a price taker as prices are determined by the buyers and not sellers of goods
3). A perfectly competitive firm produces products that are identical to the products produced by its competitors
4). A perfectly competitive firm cannot charge above the market price as it will lose all its customers
1 answers
According to the passage, a perfectly competitive firm cannot sell its goods above the market price as it would lose all of its customers to its competitors. Hence, it is forced to sell it at market price. Thus, the correct answer is option D.