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When would a firm likely be a price taker?

Option 1: Never
Option 2: When they have a monopoly
Option 3: In a purely capitalistic society
Option 4: In a purely competitive market

1 Answer

5 votes

Final answer:

A firm is a price taker in a purely competitive market, where it must accept the market-determined equilibrium price. Raising the price even slightly would cause a firm to lose all its customers to competition, as identical products are readily available. Thus (option 4) is right answer.

Step-by-step explanation:

A firm is likely to be a price taker in a purely competitive market, where identical products are offered by many sellers, and no single firm has control over the market price. In such a market, firms must accept the prevailing equilibrium price set by the forces of supply and demand. If a firm tried to raise its price even by a cent, it would lose all of its sales to competitors, because consumers could easily find the same product at a lower price from other sellers.

So, in response to the student's question, a firm would likely be a price taker in Option 4: In a purely competitive market. For example, individual farmers selling wheat cannot influence the market price for wheat; they must accept the price as given. This phenomenon occurs because the firm is just a small player in the market and changing its production levels does not noticeably affect overall supply or prices.

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