Multiple Choice
In a competitive market with only two firms, each firm's individual supply curve is shown on a graph. What does the horizontal sum of these two supply curves represent?
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3. The Market Forces of Supply and Demand
Competitive Markets
Multiple Choice
In a competitive market in Happy Valley with three industrial firms, which of the following best describes the behavior of each firm?
A
Each firm is a price taker and cannot influence the market price.
B
Each firm sets its own price above the market equilibrium.
C
Each firm colludes with others to maximize joint profits.
D
Each firm faces a downward-sloping demand curve for its product.
Verified step by step guidance1
Understand the characteristics of a perfectly competitive market: many firms, identical products, and free entry and exit.
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 because products are identical and there are many sellers, firms cannot set prices above the market equilibrium without losing all customers.
Note that collusion is not typical in perfectly competitive markets because firms act independently and competition prevents joint profit maximization.
Remember that each firm faces a perfectly elastic (horizontal) demand curve at the market price, not a downward-sloping one.
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