The demand curve, In a perfectly competitive market, is as follows:
qD = 210 – p
Assume that the market consists of identical firms. The supply curve of a single firm is given by
qsf = 15 + p for p >=30
= 0 for 0<=p < 30
With free entry and exit of the firms, equilibrium market quantity will be?, equilibrium number of firms will be?
Answer & explanation
Correct answer: option 3
The correct answer is Option 3: Four
We know, with free entry and exit; the market will be in equilibrium at a price which equals the minimum average cost of the firms.
Therefore, the equilibrium price is 30. At this price, market will supply that quantity which is equal to the market demand.
Therefore, from the demand curve, we get the equilibrium quantity as
qD =210 – p
= 210 – 30
= 180.
Single firm quantity supplied will be
qsf = 15 + p
= 15 + 30 = 45.
So number of equilibrium firms will be = qD / qsf
= 180/45
= 4.