Which of the following is correct in respect of a price taking firm in a perfect competition?
Answer & explanation
Correct answer: option 2
The correct answer is Option 2: If the firm sets a price which is less than or equal to the market price, the firm can sell as many units of the good as it wants to sell.
- A price-taking firm in perfect competition cannot influence the market price and must accept it as given.
- If a firm sets a price above the market price, it will not be able to sell any of its goods because buyers can purchase the same homogeneous product from other firms at the market price.
- If the firm sets a price equal to or below the market price, it can sell as many units as it wants, as buyers are willing to buy at the prevailing market price.
- Option 1 is incorrect because it incorrectly states "buy" instead of "sell." Firms in perfect competition are sellers, not buyers.