Which of the following best describes the demand curve perceived by a perfectly competitive firm?

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

Answer: (B)

Verified step by step guidance

1. Understand that a perfectly competitive firm is a price taker, meaning it cannot influence the market price and must accept it as given.
2. Recall that the demand curve faced by a perfectly competitive firm is the firm's individual demand curve, which shows the quantity the firm can sell at different prices.
3. Since the firm can sell any quantity at the market price but cannot sell anything at a higher price, the demand curve is perfectly elastic at the market price.
4. This means the demand curve is a horizontal line at the market price level, reflecting infinite elasticity.
5. Therefore, the demand curve is not upward sloping, downward sloping, or perfectly inelastic; it is perfectly elastic at the market price.