What is a 'price taker' firm?

• A. A firm with market power that can set its own price
• B. A firm that operates under a monopoly price
• C. A firm that sets price at random
• D. A firm in a perfectly competitive market that cannot influence the general level of prices

Answer: (D)

In a perfectly competitive market, individual firms have no power to set prices because there are many firms selling identical products and buyers can switch easily. Each firm faces a perfectly elastic demand at the going market price, meaning it can sell as much as it wants at that price but cannot raise or lower it. So the firm takes the price as given, and its marginal revenue from selling an extra unit equals the market price. This is why the correct description is a firm in a perfectly competitive market that cannot influence the general level of prices.

The other ideas describe situations where a firm can influence price: a firm with market power can set its own price; a monopoly sets a price higher than marginal cost; pricing at random isn’t consistent with how markets determine prices.