Question

11. If the individual firm tried to charge a higher price for its product:

a) other firms would charge a lower price

b) other firms would also chatge a higher price

c) it would lose its customers

d) the market price would rise

12. The individual firm has no incentive to charge a lower price for its product because:

a) the effect on revenue and profit is unpredictable

b) revenue and profit would be unchanged

c) revenue and profit would be lower but the market price would fall slightly

d) revenue would be lower but the market would be unchanged

For questions (11) to (12) consider the pair of graphs describing perfect competition below: D 11. If the individual firm tried to charge a higher price for its product: a) other firms would charge a lower price b) other firms would also charge a higher price c) it would lose its customers d) the market price would rise 12. The individual firm has no incentive to charge a lower price for its product because: a) the effect on revenue and profit is unpredictable b) revenue and profit would be unchanged c) revenue and profit would be lower but the market price would fall slightly d) revenue and profit would be lower but the market price would be unchanged For questions (13) and (14) consider the graph below:

Answer 1

Introduction:-

A perfect competition market is a situation in which both buyers and sellers are well informed and the market is so well developed, that the prices of the commodities are determined by the forces of demand and supply. Individual buyers and sellers have little to no control in deciding the prices and any changes made by them are short lived in nature.

Case Specifics:-

Question 11:-

If a firm operating under perfect competition were to charge a higher price than the equilibrium price, the customers would stop purchasing goods from the company and would switch over to those selling at an equilibrium price. Other sellers cannot again afford to change the price of the product because they would meet the same fate.

If a firm were unilateral in changing the prices without an actual increase in cost of production for all the sellers, it would certainly lose customers to competition.

Thus, the correct answer to this question is option (c)

Other firms would not charge a lower price, since they have no incentives to do so and would start making losses if they were to take such a decision. This happens because in a perfect competition, firms already operate at optimum costs and levels of production. Any deviation from which would cause losses to the company.

If the firms charged a higher price, as indicated above they would lose out on customers and ultimately decline.

The market prices in this case cannot rise, as other players would not follow the actions of one in order to save their customer base.

Question 12)

If a firm were to charge a rate lower than equilibrium, then under the conditions of perfect competition, it would make losses. Each firm under perfect competition operates at the equilibrium cost of production. If it were to decrease the prices of the product, even though its demand may increase for a brief period of time, it would still make losses and would ultimately perish out and would have to exit the market. No other firm would follow it and the market prices would remain unchanged.

The correct answer to this is option (d)

Since there are changes in revenue and profit all other options are incorrect. Market prices in case of perfect competition are determined by forces of demand and supply and unilateral changes by a single seller will not cause market prices to change hence all other options are incorrect.

Please feel free to ask your doubts in the comments section if any.