The figure below depicts the short-run market equilibrium in a perfectly competitive market and the cost curves for a representative firm in that market. Assume that all firms in this market have identical cost curves. A starting assumption about this industry was that all of the firms in the market had identical cost curves. This assumption is:
A)unrealistic because each firms is unique.
B)realistic because any cost-saving innovation adopted by one firm will be quickly adopted by others.
C)unrealistic because firms closely guard the details of their production processes.
D)realistic because firms rarely seek out cost-saving innovations.

Question

The figure below depicts the short-run market equilibrium in a perfectly competitive market and the cost curves for a representative firm in that market. Assume that all firms in this market have identical cost curves.  A starting assumption about this industry was that all of the firms in the market had identical cost curves. This assumption is:
A)unrealistic because each firms is unique. 
B)realistic because any cost-saving innovation adopted by one firm will be quickly adopted by others. 
C)unrealistic because firms closely guard the details of their production processes. 
D)realistic because firms rarely seek out cost-saving innovations.

Quizplus · Accepted Answer

In a perfectly competitive market, firms are price takers and must accept the market price. Therefore, they have no market power and must adopt the most efficient production methods in order to minimize costs and earn a profit. If one firm discovers a cost-saving innovation, it will quickly spread to other firms in the market in order to remain competitive. This means that all firms in the market will have similar cost curves, making the assumption of identical cost curves realistic.

The Figure Below Depicts the Short-Run Market Equilibrium in a Perfectly