Which of the following best describes the competitive tendencies of small firms in a competitive market?

• A. They can set prices above the market equilibrium due to their market power.
• B. They face downward-sloping demand curves for their individual products.
• C. They collude to control output and influence prices.
• D. They are price takers and must accept the market price.

Answer: (D)

Verified step by step guidance

1. Understand the nature of a perfectly competitive market: it consists of many small firms selling identical products, where no single firm can influence the market price.
2. Recall that in perfect competition, each firm faces a perfectly elastic (horizontal) demand curve at the market price, meaning they are price takers and must accept the market price.
3. Recognize that because firms are price takers, they cannot set prices above the market equilibrium; doing so would result in zero sales as buyers would purchase from other firms.
4. Note that the demand curve for an individual firm in perfect competition is not downward sloping but perfectly elastic, reflecting the firm's inability to influence price.
5. Understand that collusion to control output and influence prices is not characteristic of perfectly competitive markets, as firms act independently and competition prevents such behavior.