Which of the following statements applies to a purely competitive producer?
a. It will not advertise its product.
b. In long-run equilibrium it will earn an economic profit.
c. Its product will have a brand name.
d. Its product is slightly different from those of its competitors.
The correct answer and explanation is :
The correct answer is:
a. It will not advertise its product.
Explanation:
A purely competitive producer operates in a perfectly competitive market, which is characterized by several key features:
- Many Buyers and Sellers: There are numerous producers and consumers, meaning no single producer can influence the market price.
- Homogeneous Products: All firms produce identical or perfectly substitutable products. This means consumers do not distinguish between products from different producers based on brand, quality, or other differentiating factors.
- Free Entry and Exit: New firms can easily enter the market if they see an opportunity for profit, and existing firms can exit if they are not profitable.
- Price Taker: Each producer is a “price taker,” meaning they accept the market price as given and cannot influence it by their own actions.
Now, let’s analyze each option:
a. It will not advertise its product:
In a perfectly competitive market, advertising is unnecessary and typically ineffective because all the products are identical. Since consumers see no difference between the products of different firms, there is no incentive for producers to advertise their goods. The market price is determined by supply and demand, and firms simply produce at that price. Thus, a purely competitive firm does not advertise its product.
b. In long-run equilibrium it will earn an economic profit:
This statement is incorrect. In the long-run, a purely competitive producer earns zero economic profit (normal profit). This happens because, in the long run, any positive economic profit will attract new firms to enter the market, increasing supply and driving prices down until profits are eliminated. Conversely, if firms are making losses, some will exit the market, reducing supply and driving prices up until profits return to zero.
c. Its product will have a brand name:
This is incorrect. Since the product is homogeneous, there is no need for branding or differentiation. All firms sell identical products, so branding is not a feature of purely competitive markets.
d. Its product is slightly different from those of its competitors:
This is also incorrect. In perfect competition, the products offered by all firms are identical. There is no differentiation in terms of quality, design, or other attributes. If a firm’s product were different, it would not be in a purely competitive market.
In summary, a purely competitive producer will not advertise its product, as the products are identical and the market price is determined by overall supply and demand, not by individual firm actions.