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:

• 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.

• 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.

• 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).