Which of the following factors best illustrate why the demand curve for a purely competitive firm is perfectly elastic?

• A. The firm faces a downward-sloping demand curve due to product differentiation.
• B. The firm experiences decreasing marginal returns as output increases.
• C. The firm can sell any quantity of output at the market price without affecting the price.
• D. The firm is able to set its own price above the market equilibrium.

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the nature of a purely competitive firm. In perfect competition, the firm is a price taker, meaning it cannot influence the market price and must accept the prevailing market price.
2. Step 2: Recognize that the demand curve faced by a purely competitive firm is perfectly elastic. This means the firm can sell any quantity of its product at the market price, but if it tries to charge a higher price, it will sell nothing.
3. Step 3: Analyze the options given. A downward-sloping demand curve due to product differentiation applies to imperfect competition, not perfect competition.
4. Step 4: Decreasing marginal returns relate to production costs and do not directly affect the shape of the demand curve faced by the firm.
5. Step 5: The correct reason for a perfectly elastic demand curve is that the firm can sell any quantity at the market price without affecting that price, reflecting the firm's inability to set prices above the market equilibrium.