Question

Under perfect competition, there are (LO4) a) many firms producing an identical product b) a few firms producing an identical product c) many firms producing a differentiated product d) a few firms producing a differentiated product

Short answer

The correct answer is \(a)\) many firms producing an identical product, as it best fits the description of perfect competition.

Step-by-step solution

Option a) many firms producing an identical product

In perfect competition, there are many firms producing an identical or homogeneous product. These firms have no control over market price and act as price takers. This fits the description of perfect competition, so we're considering this option as correct.

Option b) a few firms producing an identical product

If there were only a few firms producing an identical product, it would represent an oligopoly, where a small number of firms dominate the market. This does not fit the description of perfect competition, so we can eliminate this option.

Option c) many firms producing a differentiated product

If there were many firms producing a differentiated product, we would be describing monopolistic competition, where there are many competitors, but their products are not identical, and each firm has some control over the price of their own product. This does not fit the description of perfect competition, so we can eliminate this option.

Option d) a few firms producing a differentiated product

If there were a few firms producing a differentiated product, this would again represent an oligopoly, where a small number of firms with differentiated products dominate the market. This does not fit the description of perfect competition, so we can eliminate this option. After reviewing each option, we can conclude that:

The Correct Answer

\(a)\) many firms producing an identical product, as it best fits the description of perfect competition.