Question:
If a firm faces a perfectly elastic demand curve for its product, then
(1) that firm is not a price taker.
(2) firm is able to lower its price to increase sales.
(3) firm is able to raise its price to increase total revenue.
(4) firm’s marginal revenue curve is horizontal at the market price.
(5) firm will always make zero economic profits.
Correct Answer:
(4)
Answer Explanation:
A perfectly elastic (horizontal) demand curve implies the firm is operating in perfect competition and is a “price taker”. Because the firm can sell all it wants at the market price, every additional unit sold adds exactly the market price to total revenue, meaning Price = Marginal Revenue (MR). Thus, the MR curve is horizontal.
Topic: Market Structures Year: 2020
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