Read the following statements - Assertion (A) and Reason (R):
Assertion (A): Perfect competition consists of price-taking firms. If a firm sets a price above the market price, it will be unable to sell any quantity of the good that it produces.
Reason(R): Perfectly competitive markets have homogenous goods and free entry and exit.
From the given alternatives choose the correct one:
Answer & explanation
Correct answer: option 1
The correct answer is Option 1: Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).
Let's analyze the assertion and reasoning:
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Assertion (A): Perfect competition consists of price-taking firms. If a firm sets a price above the market price, it will be unable to sell any quantity of the good that it produces. This is true. In perfect competition, firms are price takers. If a firm tries to charge a higher price, buyers will simply purchase the identical product from other firms at the market price.
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Reason (R): Perfectly competitive markets have homogenous goods and free entry and exit.This is also true. These are key characteristics of perfectly competitive markets.
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Relationship:
- The reasoning directly explains the assertion. The fact that goods are homogeneous (identical) means that buyers have no preference for one firm's product over another.
- Free entry and exit ensures that if one firm tried to charge a higher price, other firms could easily enter and sell at the market price, or existing firms would increase their supply at the market price.
- Therefore, the reasoning correctly explains why firms are price takers and why they cannot sell at a price above the market price.
Therefore, the correct answer is: ☀ Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).