Question

1) A perfectly competitive firm is said to face a perfectly elastic demand curve

A. Explain why the price elasticity is so high under perfect competition:

B. What is the consequences of a perfectly elastic demand curve on the marginal revenue received by the individual perfect competitor?

C. Based on your answers to b, state the profit optimizing rule (optimal Q) to as it applies to perfect competitors ONLY:

Answer 1

A. Price elasticity of demand is so high under perfect competition because there are so many producers of the same product hence, even a small change in price creates a huge difference.

B. The marginal revenue received by each competitor is generally equal in perfect competition as, Price level adjusts itself really quickly and all the products in perfect competition comes to same price.

C. For profit maximization rule for perfect competitors marginal cost = marginal price of each good.