In a perfectly competitive market, the demand curve is as follows
qD = 185 – p for 0 ≤ p < 185
= 0 for p ≥ 185
The supply curve of a single firm is given by (Assume that the market consists of identical firms)
qsf = 15 + p for p ≥ 25
= 0 for 0 ≤ p < 25
With free entry and exit of the firms, equilibrium number of firms will be?
Answer & explanation
Correct answer: option 1
The correct answer is Option 1: 4
Here's how to solve this problem:
1. Determine the Equilibrium Price: With free entry and exit in perfect competition, the equilibrium price will be at the minimum point where the firm is willing to supply. This is p = 25.
2. Calculate the Market Demand: Substitute the equilibrium price (p = 25) into the demand equation:
qD = 185 - 25 = 160
3. Calculate the Supply of a Single Firm: Substitute the equilibrium price (p = 25) into the firm's supply equation:
qsf = 15 + 25 = 40
4. Calculate the Number of Firms: Divide the total market demand by the supply of a single firm:
* Number of firms = qD / qsf = 160 / 40 = 4
Therefore, the equilibrium number of firms is 4