A true statement about perfect competition

A perfectly competitive firm is one of many sellers of an identical product, and each one is too small to move the market price. Whatever price the market sets, the firm can sell as much as it likes at that price and nothing above it. That makes it a price taker.

Because the firm takes the price as given, its demand curve is a horizontal line at that price, and P = MR. It picks output where P = MR = MC, not where price equals ATC. Its short-run supply curve is the part of its MC curve above minimum AVC. And because entry and exit are free, any economic profit draws in new firms until price falls to minimum ATC, leaving zero economic profit in the long run.

Each choice

• A (correct). Many sellers of an identical product means each firm takes the market price as given.
• B. Profit is maximized where MR = MC, which for this firm means P = MC. Price equals ATC is the break-even condition reached in long-run equilibrium, not the rule a firm uses to choose output.
• C. The market demand curve slopes down, but the individual firm faces a horizontal demand curve at the market price. This mixes up the market graph and the firm graph.
• D. The two curves are swapped. The short-run supply curve is the marginal cost curve above the minimum of average variable cost, not the AVC curve.
• E. Free entry wipes out economic profit in the long run. A student may be thinking of accounting profit, which can stay positive even when economic profit is zero.