How many of the following statements are true of a perfectly competitive market?
(A) Each buyer and seller is very small compared to the size of the market.
(B) A buyer gets the same product whichever firm she buys from.
(C) It is easy for firms to enter the market and to leave it.
(D) Buyers know the price of the product, but not its quality.
(E) A firm can raise its price a little above the market price and still keep some of its buyers.
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Three
Statements (A), (B) and (C) describe three features of perfect competition. (D) and (E) go against them.
(A) Each buyer and seller is very small compared to the size of the market. — True. This follows from the large number of buyers and sellers.
(B) A buyer gets the same product whichever firm she buys from. — True. The product is homogenous.
(C) It is easy for firms to enter the market and to leave it. — True. This is free entry and exit.
(D) Buyers know the price of the product, but not its quality. — False. Under perfect information buyers know the price, the quality and other details.
(E) A firm can raise its price a little above the market price and still keep some of its buyers. — False. A firm that charges above the market price loses all its buyers.
So three statements are true.
NCERT (2026-27): “4.1 Perfect Competition: Defining Features … The existence of a large number of buyers and sellers means that each individual buyer and seller is very small compared to the size of the market. This means that no individual buyer or seller can influence the market by their size. Homogenous products further mean that the product of each firm is identical. So a buyer can choose to buy from any firm in the market, and she gets the same product. Free entry and exit mean that it is easy for firms to enter the market, as well as to leave it. This condition is essential for the large numbers of firms to exist. If entry was difficult, or restricted, then the number of firms in the market could be small. Perfect information implies that all buyers and all sellers are completely informed about the price, quality and other relevant details about the product, as well as the market.” “4.1 Perfect Competition: Defining Features … A price-taking firm believes that if it sets a price above the market price, it will be unable to sell any quantity of the good that it produces. …” |