Which of the following statements best reflects a price-taking firm in a competitive market?

• A. The firm sets its own price above the market equilibrium to maximize profit.
• B. The firm faces a downward-sloping demand curve for its product.
• C. The firm can influence the market price by changing its level of output.
• D. The firm can sell any quantity of its product at the market price without affecting that price.

Answer: (D)

Verified step by step guidance

1. Understand the concept of a price-taking firm: In a perfectly competitive market, individual firms are price takers, meaning they accept the market price as given and cannot influence it by their own actions.
2. Recall the characteristics of a price-taking firm: such a firm faces a perfectly elastic (horizontal) demand curve at the market price, implying it can sell any quantity at that price without affecting it.
3. Analyze the given statements: A firm that sets its own price above the market equilibrium is not a price taker, but a price maker, which contradicts perfect competition.
4. Recognize that a downward-sloping demand curve indicates some market power, which a price-taking firm does not have; instead, it faces a horizontal demand curve at the market price.
5. Conclude that the correct statement is the one describing the firm’s ability to sell any quantity at the market price without affecting that price, which aligns with the definition of a price-taking firm.