The correct option is 2 and 3 only.
Explanation
In a perfectly competitive market structure, an individual firm is a "price-taker." The equilibrium price is determined by the interaction of market demand and market supply for the entire industry. The individual firm must accept this prevailing price and can sell any quantity of output at this specific price level.
Statement-wise Analysis:
- Statement 1 is Incorrect. The price line for an individual firm in a perfectly competitive market is a horizontal straight line parallel to the X-axis (which represents Output), not the Y-axis. This horizontal shape indicates that the price remains constant regardless of the quantity of output the firm decides to produce or sell. A vertical line would imply a fixed quantity independent of price, which is incorrect in this context.
- Statement 2 is Correct. The price line graphically depicts the relationship between the market price (plotted on the Y-axis) and the firm's output level (plotted on the X-axis). It illustrates that the price is a fixed parameter for the firm and does not change with variations in the firm's output.
- Statement 3 is Correct. Since a price-taking firm can sell infinite quantities at the market price but nothing at a higher price, the demand curve facing the firm is perfectly elastic. Mathematically, Price ($P$) equals Average Revenue ($AR$) and Marginal Revenue ($MR$). Therefore, the horizontal price line coincides perfectly with the demand curve facing the firm ($D = P = AR = MR$).
Key Takeaway:
In perfect competition, the individual firm faces a perfectly elastic demand curve. This is represented graphically as a horizontal line parallel to the X-axis, where Price = Average Revenue = Marginal Revenue.