What assumptions are necessary for a market to be perfectly competitive? In light of what you have learned in this chapter, why is each of these assumptions important? For a market to be perfectly competitive, A. only a few firms may produce output, firms must have market power, and firms must produce a homogenous product. B. firms must be price takers, firms must produce a homogeneous product, and firms must be able to easily enter and exit the market. C. only one firm can produce output, no close substitutes may exist, and firms must not be able to enter the market. D. only one firm can have access to a key input, the government must regulate entry of new firms, and the long-run average cost of production must be decreasing. E. firms must have market power, firms must produce a differentiated product, and firms must be able to easily enter and exit the market.

Question

Olson

Business

1 January, 02:26

What assumptions are necessary for a market to be perfectly competitive? In light of what you have learned in this chapter, why is each of these assumptions important? For a market to be perfectly competitive, A. only a few firms may produce output, firms must have market power, and firms must produce a homogenous product. B. firms must be price takers, firms must produce a homogeneous product, and firms must be able to easily enter and exit the market. C. only one firm can produce output, no close substitutes may exist, and firms must not be able to enter the market. D. only one firm can have access to a key input, the government must regulate entry of new firms, and the long-run average cost of production must be decreasing. E. firms must have market power, firms must produce a differentiated product, and firms must be able to easily enter and exit the market.

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Answers (1)

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Tristen Ferrell · Answer 1

The correct answer is option B.

Explanation:

In a perfectly competitive market, there is a large number of sellers selling homogenous products. Because of a large number of firms selling identical products, no single firm can affect the price and output level in the market.

All the firms are price takers and face a horizontal line demand curve. There is no restriction on the entry and exit of firms in the market. That is why firms earn zero economic profits in the long run.