The following graphs depict a perfectly competitive firm and its market.
Assume that all firms in this industry have identical cost functions.
A starting assumption about this industry was that all of the firms had identical cost functions.This assumption
A)is unrealistic because all firms are unique.
B)is realistic because any cost advantage of one firm will be quickly adopted by the others.
C)is unrealistic because firms closely guard their production process secrets.
D)is unrealistic because competition forces all firms to seek the most efficient production processes.

Question

The following graphs depict a perfectly competitive firm and its market.
Assume that all firms in this industry have identical cost functions. 
A starting assumption about this industry was that all of the firms had identical cost functions.This assumption
A)is unrealistic because all firms are unique. 
B)is realistic because any cost advantage of one firm will be quickly adopted by the others. 
C)is unrealistic because firms closely guard their production process secrets. 
D)is unrealistic because competition forces all firms to seek the most efficient production processes.

Quizplus · Accepted Answer

In a perfectly competitive market, firms are price takers which means they have no control over the market price and must accept it. As all firms have identical cost functions, any firm that has a cost advantage will be able to offer a lower price and capture more market share. This competitive pressure ensures that firms cannot sustain a cost advantage for long and must adopt the most efficient production processes to remain competitive. Thus, the assumption that all firms in this industry have identical cost functions is realistic.

The Following Graphs Depict a Perfectly Competitive Firm and Its