Which of the following statements are correct regarding firms in perfect competition?
• [(A)] No single buyer or seller can influence the market price.
• [(B)] Products sold by different firms are differentiated to attract customers.
• [(C)] There are no barriers to entry or exit in the long run.
• [(D)] Firms in a perfectly competitive market always make super-normal profit in the long run. Choose the correct answer:

Question

Read the given passage and answer the following question:

The demand for bananas is not very responsive to a change in price of bananas. When the percentage change in quantity demanded is less than the percentage change in market price, \( e_D = 0.5 \) is estimated to be less than one and the demand for the good is said to be inelastic at that price. Demand for essential goods is often found to be inelastic.

When the percentage change in quantity demanded is more than the percentage change in market price, the demand is said to be highly responsive to changes in market price and the estimated \( e_D > 1 \). The demand for the good is said to be elastic at that price. Demand for luxury goods is seen to be highly responsive to changes in their market prices and \( e_D > 1 \).

When the percentage change in quantity demanded equals the percentage change in its market price, \( e_D = 1 \) is estimated to be equal to one and the demand for the good is said to be unitary-elastic at that price. Note that the demand for certain goods may be elastic, unitary elastic, and inelastic at different prices. In fact, in the next section, elasticity along a linear demand curve is estimated at different prices and shown to vary at each point on a downward-sloping demand curve.

Answer 1

Step 1: Understanding the Concept:
Perfect competition is a theoretical market structure with a very large number of participants, homogeneous products, perfect information, and no entry/exit barriers.
Step 2: Detailed Explanation:
Let's analyze the characteristics based on the statements:
Statement (A): No single influence on price.
In perfect competition, each firm's share of the total market is infinitesimal. Therefore, no individual firm or consumer can change the market equilibrium price by altering their individual supply or demand. Firms are "price takers."
Hence, (A) is correct.
Statement (B): Product differentiation.
In perfect competition, products are homogeneous or identical (e.g., standard agricultural commodities).
Product differentiation is the hallmark of Monopolistic Competition.
Hence, (B) is incorrect.
Statement (C): Free entry and exit.
There are no legal, financial, or technical barriers. New firms can enter if there are profits, and existing firms can leave if there are losses.
Hence, (C) is correct.
Statement (D): Super-normal profit in the long run.
Because of free entry, if firms earn super-normal profits, new firms will enter. This increases market supply, lowering the price until profits are wiped out. Thus, firms earn only normal profit in the long run.
Hence, (D) is incorrect.
Step 3: Final Answer
Since only (A) and (C) are true characteristics of perfect competition, option (A) is the correct answer.

Show Hint

The Correct Option is A

Solution and Explanation

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