Multiple Choice
In a perfectly competitive market, what typically happens when a new firm enters an industry?
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3. The Market Forces of Supply and Demand
Competitive Markets
Multiple Choice
Which of the following best describes a firm operating in a perfectly competitive market?
A
It is a price taker and can sell any quantity at the market price.
B
It faces a downward-sloping demand curve for its product.
C
It sets the market price for its product.
D
It can earn long-run economic profits due to barriers to entry.
Verified step by step guidance1
Understand the characteristics of a perfectly competitive market: many firms, identical products, free entry and exit, and perfect information.
Recall that in perfect competition, each firm is a price taker, meaning it accepts the market price as given and cannot influence it.
Recognize that the demand curve faced by an individual firm in perfect competition is perfectly elastic (horizontal) at the market price, allowing the firm to sell any quantity at that price.
Contrast this with a downward-sloping demand curve, which is typical for a monopoly or monopolistic competition, where firms have some price-setting power.
Note that in the long run, firms in perfect competition earn zero economic profits due to free entry and exit, so they cannot sustain long-run economic profits caused by barriers to entry.
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