When a competitive firm is a "price taker" it means that the individual firm...
can change the market price of its product
is unable to change the market price of its product
sets a price for its product and never changes that price
decides to buy inputs at the lower price rather than produce output for the market
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Of the choices given here, the correct answer is the second option. Price takers are firms that are not able to change the market price of their product.
All firms in perfect competition are price takers. They are making a homogeneous good in a market in which there are many small sellers. The only way for such firms to compete is on price. The competition between the firms drives the prices down as low as they can go. Any firm that raises its prices loses its entire market share since buyers will opt to buy from other firms at the lower price. Therefore, all firms in perfect competition are price takers who cannot change their prices.
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