Consider the scenario: Amanda runs a business in a market where all firms are price takers....
Consider the scenario:
Amanda runs a business in a market where all firms are price takers. Bob suggests that she lower her price to attract even more customers. Should Amanda follow Bob's suggestion, or should she even consider raising her price? Discuss.
Homework Answers
In a perfectly competitive market, firms are price takers. In this case, firms sell identical products with no barriers to entry or exit. Every seller has full information about the market and has a small share.
1. If in this case, Amanda lowers her price than other customers, she will run into loss as the market price is the equilibrium price.
2. If Amanda increases her price, then all her customers will shift towards products of other sellers and she will have zero revenue and hence no profit at all.
Hence, Amanda should neither reduce nor increase the price of her products in this case of perfectly competitive market.
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