Which of the following best describes the representative firm in a purely competitive industry?

• A. It can set its own price above the market equilibrium.
• B. It is a price taker and cannot influence the market price.
• C. It produces a differentiated product to gain market power.
• D. It faces a downward-sloping demand curve for its product.

Answer: (B)

Verified step by step guidance

1. Understand the characteristics of a purely competitive industry: many firms, identical products, and free entry and exit.
2. Recognize that in such a market, each firm is a price taker, meaning it accepts the market price as given and cannot influence it.
3. Recall that because the product is identical and there are many sellers, the firm's demand curve is perfectly elastic (horizontal) at the market price.
4. Note that the firm cannot set its own price above the market equilibrium because buyers would simply purchase from other sellers at the lower market price.
5. Understand that producing a differentiated product or facing a downward-sloping demand curve applies to firms in imperfectly competitive markets, not purely competitive ones.