In the market for compound bows, which of the following best describes the outcome in a perfectly competitive market?

• A. Firms are price takers and the market price is determined by the intersection of supply and demand.
• B. A single firm controls the market and sets the price for all buyers.
• C. Government regulation sets the price and quantity sold in the market.
• D. Firms can set prices above the market equilibrium due to product differentiation.

Answer: (A)

Verified step by step guidance

1. Understand the characteristics of a perfectly competitive market: many firms, identical products, free entry and exit, and firms are price takers.
2. Recognize that in such a market, no single firm has the power to influence the market price because each firm’s output is small relative to the total market.
3. Recall that the market price is determined by the intersection of the overall market supply and demand curves, reflecting the equilibrium price and quantity.
4. Note that firms accept this market price and decide their output level based on maximizing profit where marginal cost equals marginal revenue (which equals the market price).
5. Compare the given options to these characteristics and identify that the correct description is: firms are price takers and the market price is determined by the intersection of supply and demand.