consider a perfectly competitive market in which all firms have the same costs. choose the statement that is incorrect
a)the market demand is elastic at the market price
b)each firm takes the market price as given and produces its profit -maximizing output
c)the market supply curve is upward sloping at prices above the firms shut down price
d)market demand and market supply determine the market price and market output.
I wish somebody who knew answered, im guessing d
The correct answer is c) the market supply curve is upward sloping at prices above the firm's shut down price. In a perfectly competitive market, the market supply curve is typically horizontal or perfectly elastic in the short run, as firms are price takers and can only adjust their quantity supplied. The market supply curve does not slope upward in this scenario.
To determine which statement is incorrect, let's go through each option:
a) "The market demand is elastic at the market price" - This statement is generally true for perfectly competitive markets. In a perfectly competitive market, firms are price takers, meaning they take the market price as given. This implies that if a firm were to increase their price even slightly above the market price, buyers will quickly switch to alternative suppliers. As a result, the firm would lose a significant portion of its customers and experience a large decrease in quantity demanded. Therefore, in a perfectly competitive market, demand tends to be elastic at the market price.
b) "Each firm takes the market price as given and produces its profit-maximizing output" - This statement is true in a perfectly competitive market. In such a market, firms have no control over the market price and can only adjust their output levels to maximize their profits based on the given price. They will produce the quantity where marginal cost equals the market price.
c) "The market supply curve is upward sloping at prices above the firm's shut down price" - This statement is also true in a perfectly competitive market. The firm's shut down price is the minimum price at which it covers its variable costs and decides to temporarily cease operations. At prices above the shut down price, the firm continues to produce and supply goods in the market, which leads to an upward sloping market supply curve.
d) "Market demand and market supply determine the market price and market output" - This statement is true in a perfectly competitive market. The interaction of market demand and supply determines the equilibrium price and quantity. If the market demand exceeds the market supply, prices tend to rise, leading to an increase in output from firms. Conversely, if the market supply exceeds the market demand, prices tend to fall, resulting in a decrease in output.
Based on the explanations provided, it appears that all the statements are correct. Therefore, none of the statements are incorrect.