In a perfectly competitive market, the demand curve facing an individual firm's product is a horizontal line at the market price. What does this imply about the firm's ability to influence the price?

• A. The firm can increase total revenue by raising its price.
• B. The firm can set its own price above the market price.
• C. The firm faces a downward-sloping demand curve.
• D. The firm is a price taker and cannot influence the market price.

Answer: (D)

Verified step by step guidance

1. Understand that in a perfectly competitive market, the market price is determined by overall supply and demand, not by any single firm.
2. Recognize that the demand curve facing an individual firm is perfectly elastic (horizontal) at the market price, meaning the firm can sell any quantity at that price but nothing at a higher price.
3. Interpret this horizontal demand curve as indicating that the firm is a price taker, which means it must accept the market price and cannot influence it by changing its own output or price.
4. Analyze why the firm cannot increase total revenue by raising its price: if it raises the price above the market price, the quantity demanded for its product drops to zero because buyers can purchase identical goods from other firms at the market price.
5. Conclude that the firm faces a perfectly elastic demand curve and therefore cannot set its own price above the market price or influence the market price in any way.