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Chapter 8: Q1 (page 210)

Firms in a perfectly competitive market are said to be 鈥減rice takers鈥濃�攖hat is, once the market determines an equilibrium price for the product, firms must accept this price. If you sell a product in a perfectly competitive market, but you are not happy with its price, would you raise the price, even by a cent?

Short Answer

Expert verified

Perfect competition have constant prices with perfectly elastic demand, so price can't be increased.

Step by step solution

01

Perfect Competition Definition 

It is a market with :

  • Large number of buyers and sellers, earning only normal profits in long run
  • Identical Goods, Uniform (industry taken) prices, Perfectly Elastic (horizontal) demand
  • Free entry & exit, full information
02

Price Determination Concept 

Perfect Competition' large number of sellers have no significant share in market supply, and hence no control over price determination.

The firm just has to 'take' the industry determined price.

Individual firm demand is perfectly elastic & horizontal, infinite quantities can be sold at constant prices.

03

Detailed Explanation 

So, Individual firm can't change the price. Doing so even by slightest extent (cents) would make them lose all customers. As demand is perfectly elastic ie infinitely responsive to price change.

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Perfectly competitive firm Doggies Paradise Inc. sells winter coats for dogs. Dog coats sell for \(72 each. The fixed costs of production are \)100. The total variable costs are \(64 for one unit, \)84 for two units, \(114 for three units, \)184 for four units, and $270 for five units. In the form of a table, calculate total revenue, marginal revenue, total cost and marginal cost for each output level (one to five units). On one diagram, sketch the total revenue and total cost curves. On another diagram, sketch the marginal revenue and marginal cost curves. What is the profit-maximizing quantity?

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