Which of the following statements about price determination is correct?
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → A buyer may pay up to the point where the utility from the product at least equals the sacrifice made in price.
Option (1) A buyer may pay up to the point where the utility from the product at least equals the sacrifice made in price. — Correct. Price must suit both the buyer and the seller. The buyer weighs the utility, or satisfaction, he gets from the product. He pays only up to the point where this utility at least equals the sacrifice made in price.
Option (2) The utility provided by the product and the intensity of demand of the buyer set the lower limit of price. — Incorrect. The limit is reversed. Utility and intensity of demand set the upper limit, the most a buyer will pay. The lower limit is set by the product cost, because the seller tries to at least cover his costs.
Option (3) A buyer may pay up to the point where the utility from the product at least equals the cost of producing it. — Incorrect. The buyer weighs utility against the price he pays. The cost of producing is the seller's concern, and it sets the floor price.
Option (4) Under conditions of free competition in the market, the price of a product tends to reach its upper limit. — Incorrect. Under free competition the price tends to settle at the lowest level. It moves towards the upper limit only when there is less competition.
NCERT (2026-27 Edition): “2. The Utility and Demand: While the product costs set the lower limits of the price, the utility provided by the product and the intensity of demand of the buyer sets the upper limit of price, which a buyer would be prepared to pay. In fact the price must reflect the interest of both the parties to the transaction—the buyer and the seller. The buyer may be ready to pay up to the point where the utility from the product is at least equal to the sacrifice made in terms of the price paid. The seller would, however, try to at least cover the costs. …” “3. Extent of Competition in the Market: Between the lower limit and the upper limit where would the price settle down? This is affected by the nature and the degree of competition. The price will tend to reach the upper limit in case there is lesser degree of competition while under conditions of free competition, the price will tend to be set at the lowest level Competitors’ prices and their anticipated reactions must be considered before fixing the price of a product. …” |