Sia
Question
Microeconomics
Posted 8 months ago
Which of the following is a characteristic of perfectly competitive markets?
Choose 1 answer:
(A) market power
(B) homogeneous goods
(C) firms set the price they charge
D) slightly differentiated goods
(E) restricted entry to new firms
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Answer from Sia
Posted 8 months ago
Solution
a
Definition of Perfect Competition: Perfectly competitive markets are characterized by several key features, including a large number of small firms, homogeneous products, and free entry and exit of firms
b
Homogeneous Goods: In a perfectly competitive market, all firms produce identical or homogeneous goods, meaning that consumers view products from different firms as perfect substitutes
c
Market Power: Firms in perfectly competitive markets are price takers, meaning they have no market power to set prices. Prices are determined by the market supply and demand
d
Entry and Exit: There are no barriers to entry or exit in a perfectly competitive market, allowing firms to freely enter or leave the market based on profitability
e
Incorrect Options:
- Market power (A) is incorrect because firms in perfectly competitive markets are price takers.
- Firms set the price they charge (C) is incorrect because prices are determined by the market.
- Slightly differentiated goods (D) is incorrect because products are homogeneous.
- Restricted entry to new firms (E) is incorrect because there are no barriers to entry or exit
Answer
(B) homogeneous goods
Key Concept
Homogeneous goods
Explanation
In perfectly competitive markets, all firms produce identical products, making them perfect substitutes for each other. This characteristic ensures that no single firm can influence the market price.
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