Which of the following statements best reflects a price-taking firm? a) If the firm were to charge more than the going price, it would sell none of its goods. b) The firm has an incentive to charge less than the market price to earn higher revenue. c) The firm can sell only a limited amount of output at the market price before the market price will fall. d) Price-taking firms maximize profits by charging a price above marginal cost.

Question

Anahi Esparza

Business

10 February, 13:00

Which of the following statements best reflects a price-taking firm? a) If the firm were to charge more than the going price, it would sell none of its goods. b) The firm has an incentive to charge less than the market price to earn higher revenue. c) The firm can sell only a limited amount of output at the market price before the market price will fall. d) Price-taking firms maximize profits by charging a price above marginal cost.

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Victoria Gardner · Answer 1

a) If the firm were to charge more than the going price, it would sell none of its goods.

Explanation:

A price taking firm is a firm that cannot influence the price at which its products sells in the market. Price taking is a feature of a perfectly competitive market.

Price taking firms in an industry usually have homogenous products. If a price taking firm decides to increase the price for its products, consumers simply substitute with other homogenous goods with lower prices. Therefore, the price taking firm sells none of its goods if it increases price.

In a price taking firm, profit maximising price = Marginal cost = marginal revenue.

If a price taking firm sets price below the market price, it would make losses.