Explanation

In perfect competition, a firm is a price taker, meaning it cannot influence the market price. The demand curve faced by an individual perfectly competitive firm is perfectly elastic (horizontal) at the market price.

Key Concepts:

1. Perfect Competition Characteristics:

   • Many buyers and sellers
   • Homogeneous products
   • Perfect information
   • Free entry and exit
   • Price takers

2. Why Horizontal?:

   • The firm can sell any quantity at the market price
   • If the firm tries to charge above market price, it sells zero units
   • There's no incentive to charge below market price
   • The firm's marginal revenue equals price

3. Contrast with Market Demand:

   • The market demand curve for the entire industry is downward sloping
   • The firm's demand curve is horizontal at the market equilibrium price

4. Graphical Representation:

   • Horizontal line at P = market price
   • Perfectly elastic (price elasticity of demand = ∞)

Why Not Other Options?:

• A. Vertical: This would mean quantity demanded is fixed regardless of price, which doesn't apply to competitive firms
• C. Downward Sloping: This describes monopoly or imperfect competition where firms have market power to influence prices

Correct Answer: B (horizontal)