The following graphs depict a perfectly competitive firm and its market.
Assume that all firms in this industry have identical cost functions.
A starting assumption about this industry was that all of the firms had identical cost functions.This assumption
A) is unrealistic because all firms are unique.
B) is realistic because any cost advantage of one firm will be quickly adopted by the others.
C) is unrealistic because firms closely guard their production process secrets.
D) is unrealistic because competition forces all firms to seek the most efficient production processes.

Question

The following graphs depict a perfectly competitive firm and its market.
Assume that all firms in this industry have identical cost functions. 
A starting assumption about this industry was that all of the firms had identical cost functions.This assumption
A) is unrealistic because all firms are unique. 
B) is realistic because any cost advantage of one firm will be quickly adopted by the others. 
C) is unrealistic because firms closely guard their production process secrets. 
D) is unrealistic because competition forces all firms to seek the most efficient production processes.

Quizplus · Accepted Answer

In a perfectly competitive market, firms are price takers and therefore cannot influence the market price. As a result, they have to produce at the minimum efficient scale (MES) in order to survive. If one firm had a cost advantage, it could produce at a lower cost than the others and therefore charge a lower price, gaining a larger market share. This would force the other firms to either improve their efficiency or exit the market. In a competitive market, any cost advantage of one firm will be quickly adopted by the others in order to remain competitive. Therefore, the assumption that all firms in the industry have identical cost functions is realistic.

The Following Graphs Depict a Perfectly Competitive Firm and Its