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Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050

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BuyFindarrow_forward

Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050
Textbook Problem

A perfectly competitive firm

a. chooses its price to maximize profits.

b. sets its price to undercut other firms selling similar products.

c. takes its price as given by market conditions.

d. picks the price that yields the largest market share.

To determine

To determine:  The characteristic of the perfect competitive firm.

Answer

Answer: 

Option ‘c’ is correct.

Explanation

Option (c):

The competitive firm deals with the large number of buyers and sellers who trade homogeneous commodities, and the price is fixed by the market supply and demand forces. Thus, the firm is considered as a price taker. Thus, option ‘c’ is correct.

Option (a):

A profit-maximizing price is set at the point where the marginal revenue of the firm is equal to marginal cost. But in the competitive market, price is set by the equilibrium between the market demand and supply. Thus, option ‘a’ is incorrect.

Option (b):

Undercut price is done in an oligopoly. Thus, option ‘b’ is incorrect.

Option (d):

The largest market share is the driven motive for the managers whose remuneration is based on the sales revenue. Thus, option ‘d’ is incorrect.

Concept

Concept introduction:

Perfect competitive firm: Perfect competition refers to the market structure featuring more number of sellers and buyers in the market where the firm can sell the homogenous products.

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