Multiple Choice
Why do individual firms in perfectly competitive markets face horizontal (perfectly elastic) demand curves?
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11. Perfect Competition
Characteristics of Perfect Competition
Multiple Choice
Which of the following is a characteristic of a perfectly competitive industry?
A
Firms are price takers
B
Products are highly differentiated
C
There are significant barriers to entry
D
Firms can easily set prices above market equilibrium
Verified step by step guidance1
Understand the concept of a perfectly competitive industry: it is a market structure characterized by many firms selling identical products, with no single firm able to influence the market price.
Recall that in perfect competition, products are homogeneous, meaning there is no differentiation between goods offered by different firms.
Recognize that firms in perfect competition are price takers, which means they accept the market price as given and cannot set prices above the equilibrium price.
Note that there are no significant barriers to entry or exit in a perfectly competitive market, allowing new firms to enter freely if profits exist.
Evaluate each option against these characteristics: the correct characteristic is that firms are price takers, while product differentiation, significant barriers to entry, and the ability to set prices above equilibrium do not apply.
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