What is a price taker? A price taker is O A. a firm with a downward-sloping demand curve. O B. a firm that is unable to affect the market price. Oc. a firm with a perfectly inelastic demand curve. O D. a firm that has the ability to charge a price greater than marginal cost. O E. a firm that does not seek to maximize profits. When are firms likely to be price takers? A firm is likely to be a price taker when O A. it sells a differentiated product. O B. barriers to entry are substantial. OC. it has market power. O D. it represents a small fraction of the total market. O E. firms in the industry collude. None What is a price taker? A price taker is O A. a firm with a downward-sloping demand curve. OB. a firm that is unable to affect the market price. OC. a firm with a perfectly inelastic demand curve. OD. a firm that has the ability to charge price greater than marginal cost. OE. a firm that does not seek to maximize profits. When are firms likely to be price takers? A firm is likely to be a price taker when O A. it sells a differentiated product. OB. barriers to entry are substantial. OC. it has market power. O D. it represents a small fraction of the total market. OE. firms the industry collude.
The Correct Answer and Explanation is :
Correct Answers:
- What is a price taker?
B. A firm that is unable to affect the market price. - When are firms likely to be price takers?
D. It represents a small fraction of the total market.
Explanation:
What is a price taker?
A price taker is a firm or individual that cannot influence the market price of the product it sells. Instead, it must accept the prevailing market price determined by supply and demand. This typically occurs in perfectly competitive markets, where there are numerous buyers and sellers trading a homogeneous product. Since no single firm has significant market share, its output decisions do not affect the market price.
For example, wheat farmers operate in a market where all wheat is considered identical, and no single farmer can change the price of wheat by altering their production. As a result, they are price takers and must accept the market price for wheat.
When are firms likely to be price takers?
Firms are likely to be price takers when they represent a small fraction of the total market (D). This situation arises in markets characterized by perfect competition. Key features of such markets include:
- Large Number of Sellers and Buyers: No single participant has the power to influence market prices.
- Homogeneous Products: All products are identical, leaving no room for differentiation or branding.
- Free Entry and Exit: Barriers to entry and exit are minimal, enabling new firms to enter the market if profits are high or exit if profits are low.
- Perfect Information: Buyers and sellers have complete information about prices and product quality.
In contrast, firms with market power, selling differentiated products, or operating in markets with substantial barriers to entry, are not price takers. These firms can influence prices to some extent, either by setting their own prices or colluding with others.
By operating in highly competitive markets, price takers play a crucial role in ensuring market efficiency and aligning prices with production costs.