Test: Perfectly Competitive Market - JAMB MCQ

One of the key assumptions of a perfectly competitive market is that buyers and sellers have perfect knowledge about the market conditions. This means that all participants in the market are fully aware of the prices, qualities, and availability of goods and services. They have access to complete information, which allows them to make rational decisions and maximize their utility or profits.

In a perfectly competitive market, no individual firm has the ability to set or influence the market price. Instead, firms are price takers, meaning they have to accept the prevailing market price determined by the forces of supply and demand. Individual firms have no control over the market price and must adjust their production levels accordingly.

In a perfectly competitive market, each firm is a price taker. This means that firms have no influence over the market price and must accept the price determined by the overall market conditions. Individual firms have no market power to set or influence the price and must adjust their production and pricing decisions based on the prevailing market price.

In the short run, a perfectly competitive firm maximizes its profits by producing at the quantity where marginal cost equals marginal revenue. This is because in a perfectly competitive market, the marginal revenue equals the market price. By producing at the quantity where marginal cost equals marginal revenue, the firm ensures that it is minimizing its costs while maximizing its revenue, resulting in maximum profit in the short run.

In the long run, a perfectly competitive firm earns zero economic profits. This is because in a perfectly competitive market, there are no barriers to entry or exit. If firms in the market are earning positive economic profits, new firms will be attracted to enter the market, increasing competition and driving down prices. As prices decrease, economic profits diminish until they reach zero in the long-run equilibrium. Similarly, if firms are incurring losses, some firms will exit the market, reducing competition and allowing remaining firms to earn zero economic profits.

In long-run equilibrium, the price of a perfectly competitive firm will be equal to its average cost. In a perfectly competitive market, firms will adjust their production levels until they reach a point where price equals average cost. This ensures that firms are covering all their costs, including both fixed and variable costs, while earning zero economic profits. If the price were below average cost, firms would incur losses and exit the market, while if the price were above average cost, new firms would enter the market, increasing competition and driving down prices.

In the long run, a perfectly competitive firm adjusts its production level until average revenue equals average cost. This ensures that the firm is earning zero economic profits. If average revenue exceeds average cost, firms are earning positive economic profits, attracting new firms to enter the market. As new firms enter, competition increases, driving down prices until average revenue equals average cost. If average revenue is less than average cost, firms are incurring losses, leading some firms to exit the market. As firms exit, competition decreases, allowing the remaining firms to increase their prices until average revenue equals average cost.

Price discrimination is NOT a characteristic of a perfectly competitive market. Price discrimination refers to the practice of charging different prices to different customers based on their willingness to pay. In a perfectly competitive market, all firms sell identical or homogeneous products at the same price to all customers. There is no differentiation or customization of prices based on individual customer preferences or characteristics.

In a perfectly competitive market, firms are price takers. This means that individual firms have no control or influence over the market price. They have to accept the prevailing market price and adjust their production and pricing decisions accordingly. The market price is determined by the forces of supply and demand, and individual firms have no market power to influence or manipulate the price.

In a perfectly competitive market, the demand curve faced by an individual firm is perfectly elastic or horizontal. This means that the firm can sell any quantity of output at the prevailing market price. Since individual firms have no market power, they have to accept the market price for their product and can sell as much as they want at that price without affecting it.