Why does a firm in a competitive industry charge the market price?
A)If a firm charges less than the market price, it loses potential revenue.
B)If a firm charges more than the market price, it loses all its customers to other firms.
C)The firm can sell as many units of output as it wants to at the market price.
D)All of the above are correct.

Question

Quizplus · Accepted Answer

If a firm charges less than the market price (A), it loses potential revenue. This is because customers will still be willing to pay the market price, so the firm would be selling at a lower price than it could. If a firm charges more than the market price (B), it loses all its customers to other firms. This is because customers can buy the same good or service for a lower price from another firm. Therefore, the best choice is D, which includes both of these reasons as well as the correct reason that a firm in a competitive industry charges the market price (C) - the firm can sell as many units of output as it wants to at the market price.

Why Does a Firm in a Competitive Industry Charge the Market