Which of the following is characteristic of a competitive price-taker market?

• A. Firms can freely enter and exit the market.
• B. Products are highly differentiated.
• C. Firms have significant control over market prices.
• D. There are significant barriers to entry.

Answer: (A)

Verified step by step guidance

1. Understand the concept of a competitive price-taker market: In such a market, individual firms have no power to influence the market price because the product is homogeneous and there are many sellers.
2. Recall that in a perfectly competitive market, products are identical or highly substitutable, so no firm can charge a higher price than the market price without losing all customers.
3. Recognize that firms in a competitive market are price takers, meaning they accept the market price as given and cannot influence it through their own actions.
4. Identify that free entry and exit of firms is a key characteristic of competitive markets, ensuring that profits tend toward zero in the long run and that no single firm can dominate the market.
5. Contrast this with markets where products are differentiated, firms have price-setting power, or there are significant barriers to entry, which are characteristics of imperfect competition, not perfect competition.