Multiple Choice
Why do individual firms in perfectly competitive markets face horizontal demand curves?
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11. Perfect Competition
Characteristics of Perfect Competition
Multiple Choice
In a perfectly competitive market, if the firms do not collude, which of the following is most likely to occur?
A
Firms set prices above the market equilibrium to maximize joint profits.
B
Firms restrict output to increase market prices.
C
Firms engage in price discrimination to increase their individual profits.
D
Each firm acts independently and accepts the market price as given.
Verified step by step guidance1
Understand the characteristics of a perfectly competitive market: many firms, identical products, free entry and exit, and firms are price takers.
Recognize that in perfect competition, no single firm can influence the market price because each firm's output is small relative to the total market.
Recall that firms in perfect competition maximize profits by producing where marginal cost (MC) equals market price (P), accepting the price as given.
Note that collusion or price-setting above equilibrium is not possible because firms act independently and competition drives prices to equilibrium.
Conclude that the most likely outcome is that each firm acts independently and accepts the market price as given, rather than setting prices or restricting output.
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