Why will a perfectly competitive firm not sell its product below the prevailing market price?
A) It faces inelastic demand.
B) It can sell all it wishes at the market price.
C) This would lead to a price war among sellers.
D) The sellers in the market have agreed to not sell below a specified price.
E) Its costs would increase dramatically.

Question

Quizplus · Accepted Answer

In a perfectly competitive market, the firm is a price-taker, meaning it cannot influence the market price. Therefore, the firm will sell its product at the prevailing market price because it can sell all it wishes at that price. If the firm were to sell below the market price, it would be unable to sell all of its product, resulting in a surplus. Similarly, if the firm were to sell above the market price, it would be unable to sell all of its product, resulting in a shortage. Therefore, the only rational choice for a perfectly competitive firm is to sell at the prevailing market price.

Why Will a Perfectly Competitive Firm Not Sell Its Product