Assume that the resource market is purely competitive. If the price of the resource falls, other factors constant, then a firm that sells its product in a purely competitive market will
A) increase production by a larger amount than a firm with some monopoly power in its product market.
B) increase production by a smaller amount than a firm with some monopoly power in its product market.
C) decrease production by a larger amount than a firm with some monopoly power in its product market.
D) decrease production by a smaller amount than a firm with some monopoly power in its product market.

Question

Quizplus · Accepted Answer

In a purely competitive market, firms are price takers, meaning they have no market power to influence the price of their product. Therefore, if the price of a resource falls, other factors constant, the cost of production for the firm will decrease, leading to an increase in supply. A firm with some monopoly power in its product market would have some ability to influence the price of the product, and may not respond to the change in resource price in the same way as a purely competitive firm.

Assume That the Resource Market Is Purely Competitive