Since a competitive firm sets MR = P to determine all quantities in the short run, we can conclude that:
A) each firm in the industry faces very large fixed costs.
B) the demand curve faced by each individual competitive firm is perfectly elastic.
C) the demand curve faced by each individual competitive firm is downward sloping.
D) the industry demand curve is perfectly elastic.

Question

Quizplus · Accepted Answer

Competitive firms face a horizontal, or perfectly elastic, demand curve because they are price-takers and can sell as much as they want at the market price. Therefore, the marginal revenue (MR) generated from selling an additional unit of output is equal to the market price (P). The fact that MR = P allows competitive firms to determine the profit-maximizing output level in the short run.

Since a Competitive Firm Sets MR = P to Determine