Question

Which of the following is not a characteristic of a price taker firm?

• A. \( TR = P \times Q \)
• B. AR = Price
• C. Negatively sloped demand curve
• D. Marginal revenue = Price

Hint:

A price taker firm has a perfectly elastic demand curve, meaning it can sell any quantity at the market price without affecting the price.

Answer 1

The Correct Option is C

Step 1: Understanding a Price Taker Firm:
A price taker is a firm that operates in a perfectly competitive market where the firm cannot influence the price of the good or service it sells. The firm must accept the market price as given. Key characteristics of a price taker include a perfectly elastic demand curve (horizontal), marginal revenue equal to the price, and average revenue equal to the price.
Step 2: Analyzing the Options:
- Option (A) TR = P × Q: This is true. For a price taker, total revenue is simply the price multiplied by the quantity sold, as the firm accepts the market price.
- Option (B) AR = Price: This is true. For a price taker, average revenue is equal to the price, because the price remains constant for all quantities sold.
- Option (C) Negatively sloped demand curve: This is incorrect. A price taker firm faces a perfectly elastic (horizontal) demand curve, not a negatively sloped one. The firm can sell as much as it wants at the market price, but if it tries to charge more, it loses all customers.
- Option (D) Marginal revenue = Price: This is true. In perfect competition, marginal revenue is equal to the price because the firm is a price taker.
Step 3: Conclusion and Answer:
The correct answer is (C) because a price taker firm faces a perfectly elastic demand curve, not a negatively sloped one.