The figure given below shows the aggregate demand and supply curves of a perfectly competitive market.Figure 10.7

-If a firm has a perfectly elastic demand curve, then:
A)it must be a monopoly firm.
B)it can charge any price it desires.
C)the firm has significant market power.
D)the firm has no market power.
E)the firm should shut down.

Question

The figure given below shows the aggregate demand and supply curves of a perfectly competitive market.Figure 10.7
 
-If a firm has a perfectly elastic demand curve, then:
A)it must be a monopoly firm. 
B)it can charge any price it desires. 
C)the firm has significant market power. 
D)the firm has no market power. 
E)the firm should shut down.

Quizplus · Accepted Answer

A perfectly elastic demand curve implies that consumers are very sensitive to price changes and will switch to alternative suppliers if the price goes up even slightly. This means that the firm has no market power and must accept the going market price if it wants to sell any units of its product. Therefore, option D is the correct choice. Options A, B, and C are incorrect as they imply that the firm has some ability to influence the market price, which is not the case with a perfectly elastic demand curve. Option E is irrelevant as the question does not deal with the profitability or viability of the firm.

The Figure Given Below Shows the Aggregate Demand and Supply