Which of the following best illustrates the component of 'free entry and exit' in a competitive market?

• A. New firms can easily start selling products without significant barriers.
• B. All firms sell differentiated products to attract customers.
• C. Firms set prices above marginal cost due to market power.
• D. A single firm dominates the market and controls supply.

Answer: (A)

Verified step by step guidance

1. Understand the concept of 'free entry and exit' in a competitive market: it means that new firms can enter the market easily when they see profit opportunities, and existing firms can leave without significant cost if they are making losses.
2. Identify the key characteristic of free entry and exit, which is the absence of significant barriers such as high startup costs, legal restrictions, or other obstacles that prevent firms from entering or leaving the market.
3. Analyze each option to see which one aligns with this concept: the option stating 'New firms can easily start selling products without significant barriers' directly reflects free entry and exit.
4. Recognize that options mentioning differentiated products, firms setting prices above marginal cost, or a single firm dominating the market describe other market structures or features, not free entry and exit.
5. Conclude that the best illustration of free entry and exit is the ability of new firms to enter the market easily without significant barriers.