Which of the following explains why a purely competitive firm is a price taker?

• A. Each firm produces a small fraction of total market output, so it cannot influence the market price.
• B. Firms in competitive markets have significant control over the prices they charge.
• C. The government regulates prices in purely competitive markets.
• D. Competitive firms set prices based on their own production costs, independent of the market.

Answer: (A)

Verified step by step guidance

1. Understand the concept of a purely competitive firm: such a firm operates in a market with many sellers offering identical products, so no single firm can influence the market price.
2. Recognize that in a purely competitive market, the market price is determined by the overall supply and demand, not by individual firms.
3. Note that each firm produces only a small fraction of the total market output, meaning its individual production decisions do not affect the market price.
4. Realize that because the firm's output is too small to influence price, it must accept the market price as given—hence, it is a price taker.
5. Evaluate the given options by comparing them to these principles: the correct explanation is that each firm produces a small fraction of total market output, so it cannot influence the market price.