Assignment # 2 Submission deadline: November 23, 2017 Marks: 10 1. Why a firm un
ID: 1111249 • Letter: A
Question
Assignment # 2
Submission deadline: November 23, 2017
Marks: 10
1.Why a firm under perfect competition is called price taker? How the price is determined under perfectly competitive market? (4)
2.Explain what is shut down price. How does it guide a firm in its decision whether to continue to operate or make exit in case the firm under perfectly competitive market in the short run incurs loses? Use diagram. (6)
Explanation / Answer
Ans 1)A firm under perfect competition is a price taker because there is free entry of new firms and firms produce products which are indistinguishable to every other. If a firm deviates from the market price and tries to set is own price which is higher than market price then it will lose all its customers, people will not prefer to pay a high price for the same product. If firm sets price lower than market price it will end up incurring loss. So firms under perfect competition are price takers.
Under perfect comptetion price is determined by the intersection of demand and supply curves meaning where quantity demanded is equal to quantity supplied and profit maximising output is determined at level where price is equal to marginal cost.