Multiple Choice
In a competitive market, in order to compete successfully, a producer must produce goods that are:
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3. The Market Forces of Supply and Demand
Competitive Markets
Multiple Choice
Which of the following statements regarding a competitive firm is correct?
A
A competitive firm's marginal revenue is equal to the market price.
B
A competitive firm maximizes profit where average total cost equals marginal cost.
C
A competitive firm faces a downward-sloping demand curve for its product.
D
A competitive firm can influence the market price by adjusting its output.
Verified step by step guidance1
Understand the characteristics of a perfectly competitive firm: it is a price taker, meaning it cannot influence the market price and must accept it as given.
Recall that for a competitive firm, the marginal revenue (MR) is the additional revenue from selling one more unit, which equals the market price (P) because the firm sells each unit at the same price.
Analyze the profit-maximizing condition: a competitive firm maximizes profit where marginal cost (MC) equals marginal revenue (MR), not necessarily where average total cost (ATC) equals MC.
Consider the shape of the demand curve faced by a competitive firm: it is perfectly elastic (horizontal) at the market price, not downward-sloping, because the firm can sell any quantity at that price.
Recognize that since the firm is a price taker, it cannot influence the market price by changing its output; the market price is determined by overall market supply and demand.
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