Question

Take a look at the statements below about a purely (or perfectly) competitive market. Indicate whether each statement is true or false by moving the true or false labels to the appropriate boxes. 1. In general, the market demand curve in a purely competitive market is perfectly elastic. False True 2. In general, an individual firm in a purely competitive market faces a perfectly elastic demand curve. 3. An individual firm in a purely competitive market can obtain a higher price for its product by reducing its output. 4. An individual firm in a purely competitive market must lower its price in order to sell more of its product. 5. In a purely competitive market the average revenue is equal to the market price. 6. In a purely competitive market the marginal revenue is equal to the market price.

Answer 1

Answer: 1. In a perfectly competitive market, the market demand curve is downward sloping. The elasticity of demand is different at different point on the market demand curve. Thus, given statement is |false. 2. In a perfectly competitive market, the individual firm faces a horizontal demand curve. The horizontal demand curve explains that if any individual firm charges a price slightly above market price, it would not sell any product. This implies that the demand is perfectly elastic. Thus, given statement is true

3. In perfect competition there are many producers. So, they are price taker. They cannot affect the price. Thus they cannot charge higher price for reduced amount of output. Thus, given statement is false 4. In perfect competition there are many producers. So, they are price taker. They cannot affect the prie Thus they canmot charge low price to sm f orput. Thus, given statement is |false 5. In perfect competition, the average revenue is equal to market price and also constant. In perfectly competitive market, average revenue curve is horizontal and perfectly elastic Thus, given statement is true 6. In a perfectly competitive market, market price is equal to marginal revenue because our demand curve is horizontal. This tells that, irrespective how much we produce, it always sells at the market price. Thus, given statement is true