The Dubai Gold Souk consists of over 300 stores in a specific area that all sell

Question

The Dubai Gold Souk consists of over 300 stores in a specific area that all sell jewellery. The products sold by each store are identical. 1. The price for each product in the stores is determined in part by market demand. 2. To maximise profit or to minimise losses, a store should determine what quantity to produce using the rule P-MC. 3. Demand in this market is perfectly elastic Which of the above statements are true: Only 1 is true. Only 2 is true. Both 1 and 2 are true. Both 2 and 3 are true. All three are true.

Explanation / Answer

Because the sellers are large in number and selling identical goods, the market is competitive. Hence each store uses P = MC rule for determining the optimal quantity and that market demand is downward sloping with single firm demand being perfectly elastic. Price is thus, determined by the market

Both 1 and 2 are true.

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