Question

Your aunt has a farm producing snap peas. You find out from market research that the market for snap peas is perfectly competitive, and the current market price is $2 a pound. You advise your aunt that:

a.) She can sell more by increasing her advertising budget.

b.) She can make more money by charging slightly highter prices to her consumers

c.) She should sell peas for $2 per pound.

d.) If she produces too many peas, the market price will go down.

Answer 1

In case of perfectly competitive market, each firm acts as price taker. In other words, each firm has to accept the price as decided by the market. It has to sell its product at market price.

Due to homogeneous nature of product being sold by firm and the size of firm in comparison to whole market, a firm in perfectly competitive market is not able to influence the market price either through advertisement or chaging supply.

So, if market for snap peas is perfectly competitive and the current market price is $2 per pound then we will advise our aunt that she should sell peas at $2 per pound.

The correct answer is the option (c).