Suppose that the paper clip industry is perfectly competitive. Also assume that the market price
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Suppose that the paper clip industry is perfectly competitive. Also assume that the market price for paper clips is 2 cents per paper clip. The demand curve faced by each firm in the industry is: LO10.3 a. a horizontal line at 2 cents per paper clip. b. a vertical line at 2 cents per paper clip. c. the same as the market demand curve for paper clips. d. always higher than the firm’s MC curve. |
Here is the full solution including the answer and explanation.
Explanation
a is correct
In a perfectly competitive market structure, demand is perfectly elastic. This means that the price faced by firms producing Product PC is constant and market demand is downward sloping. In perfect competition, firms are price takers and cannot affect the price. Therefore, the price is equal to the marginal revenue for the firm.
b is incorrect
The demand curve is not perfectly inelastic in a perfectly competitive firm because a small change in prices causes a huge change in demand. Therefore, the price can never be vertical.
c is incorrect
The market demand would be downward sloping but the demand for individual firms producing product PC would be horizontal as firms are price takers. Therefore, every firm faces the horizontal demand curve meaning demand is perfectly elastic.
d is incorrect
In a perfectly competitive market, price is always assumed to be equal to marginal cost. Therefore, the price cannot be higher than MC.
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