The firm in a perfectly competitive market will:

Question

Quizplus · Accepted Answer

In a perfectly competitive market, there are many firms producing identical products, and there are no barriers to entry or exit for new firms. Therefore, the firm cannot set a price higher than the market price, as it will lose customers to other firms. Similarly, setting a price lower than the variable cost will result in losses for the firm. Therefore, the best option for the firm is to set the price equal to the market price, which is determined by the supply and demand in the market. Since the firm is a price taker, it has no control over the market price and must accept it. The firm can, however, control its own output level, which will affect its profit. The firm should produce where its marginal cost equals the market price, which will ensure that it earns a normal profit in the long run. Therefore, the firm will set the price higher than the variable cost of producing the product or service, but not higher than the market price.

The Firm in a Perfectly Competitive Market Will