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Chapter 10 Perfect Competition Solutions

Question - 1 : - What are the Characteristics of a perfectly competitive market?

Answer - 1 : -

  1.  Large number of buyers and sellers
  2. Homogeneous product
  3. Free entry and exit of firms
  4. Perfect knowledge about the market
  5. Perfect mobility of factors of production
  6. Absence of transportation and selling cost

Question - 2 : - What is price line under perfect competition?

Answer - 2 : -

  1.  The price line shows the relationship between the market price and a competitive firm’s output level,
  2. The vertical height of the price line is equal to the market price as shown in the given figure.

                                   

Question - 3 : - What is the relation between market price and average revenue of a price taking firm (i.e. perfectly competitive firm)?

Answer - 3 : - The average revenue (AR) of a firm is defined as total revenue per unit of output sold. Let a firm’s output be Q and the market price be P, then TR equals P x Q. Hence,

In other words, for a price-taking firm, average revenue equals the market price.

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