Which of the following is true about a price-taking firm?
a. It is in contact with rival firms to fix the best price that all of them can charge
b. It is unable to influence the price of the product that it sells
c. It is asking the government to set a fixed price for its product
d. It can set the price of a product at any level that it wants
The correct answer and explanation is :
The correct answer is: b. It is unable to influence the price of the product that it sells.
Explanation:
A price-taking firm refers to a firm that operates in a perfectly competitive market. In such a market, individual firms have no control over the prices of the goods or services they sell. Instead, the market price is determined by the forces of supply and demand in the market as a whole. This means that price-taking firms accept the prevailing market price as a given and cannot influence or set it themselves.
To elaborate on why option b is the correct answer, let’s break down the options:
- a. It is in contact with rival firms to fix the best price that all of them can charge: This is incorrect because price-taking firms are typically in a competitive market. In perfect competition, firms do not collude with each other to fix prices. Instead, they all take the market price as given. Collusion to fix prices would be considered price-fixing and is illegal in many jurisdictions under antitrust or competition law.
- b. It is unable to influence the price of the product that it sells: This is correct. In a perfectly competitive market, there are many firms selling identical or nearly identical products. The price of the product is determined by the overall market and not by any individual firm. A price-taking firm is thus a “price taker” because it cannot set its own price and must accept the market price. If it tries to charge more than the market price, consumers will simply purchase from other firms offering the product at the market price.
- c. It is asking the government to set a fixed price for its product: This is incorrect. A price-taking firm in a competitive market does not request or need government intervention to set prices. The market price is set by the forces of supply and demand, and in the case of perfect competition, it is determined without government involvement.
- d. It can set the price of a product at any level that it wants: This is incorrect. A price-taking firm cannot set the price arbitrarily because it is a small player in a competitive market. It must accept the prevailing market price, and any attempt to charge a price higher than that would result in losing customers.
In summary, price-taking firms are at the mercy of the market, accepting the prices determined by broader economic forces rather than having the ability to influence them.