Which of the following is an example of competitive parity in a competitive market?

• A. Firms in the market charge similar prices for identical products due to free entry and exit.
• B. The government sets a price ceiling below the equilibrium price.
• C. Firms differentiate their products to avoid competition.
• D. A single firm sets the price for the entire market.

Answer: (A)

Verified step by step guidance

1. Understand the concept of competitive parity: In a perfectly competitive market, competitive parity occurs when firms charge similar prices for identical products because there are no barriers to entry or exit, and products are homogeneous.
2. Analyze each option in the context of competitive markets: Competitive parity implies that no single firm can influence the market price, and prices tend to equalize across firms due to free entry and exit.
3. Recognize that 'Firms in the market charge similar prices for identical products due to free entry and exit' directly reflects competitive parity, as it describes price uniformity and market dynamics consistent with perfect competition.
4. Identify that 'The government sets a price ceiling below the equilibrium price' is a form of price control, not competitive parity, as it involves external intervention rather than market forces.
5. Note that 'Firms differentiate their products to avoid competition' and 'A single firm sets the price for the entire market' describe monopolistic competition and monopoly scenarios, respectively, which do not exhibit competitive parity.