In a perfectly competitive market, which of the following is true about the firm's demand curve?

• A. It is perfectly inelastic at the market price.
• B. It is upward sloping because of increasing marginal cost.
• C. It is perfectly elastic at the market price.
• D. It is downward sloping due to diminishing marginal returns.

Answer: (C)

Verified step by step guidance

1. Understand the nature of a perfectly competitive market: there are many firms selling identical products, and each firm is a price taker, meaning it cannot influence the market price.
2. Recall that the firm's demand curve in perfect competition is the price line it faces, which is determined by the market and is constant for the individual firm.
3. Recognize that because the firm can sell any quantity at the market price, the demand curve it faces is perfectly elastic, meaning it is horizontal at the market price.
4. Contrast this with other types of demand curves: a perfectly inelastic demand curve is vertical, an upward sloping curve is unusual for demand and more typical for supply, and a downward sloping curve reflects typical market demand but not the firm's demand in perfect competition.
5. Conclude that the firm's demand curve in a perfectly competitive market is perfectly elastic at the market price, reflecting that the firm can sell any quantity at that price but none at a higher price.