A competitive market has 20 identical firms, each supplying q = p − 10 units for p ≥ 10 (p in rupees). Five more identical firms enter the market. At a market price of Rs 25, which of the following is correct?
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → Market supply rises by 75 units, as the market supply curve shifts to the right.
Given:
Each firm: q = p − 10
Firms: 20, then 25
Price = Rs 25
Market supply is the sum of the firms’ supplies at a price.
Each firm at Rs 25 = 25 − 10 = 15 units
Before: 20 × 15 = 300 units
After: 25 × 15 = 375 units
Rise = 375 − 300 = 75 units
The price has not changed; the number of firms has. So the market supply curve shifts to the right; it is not a movement along it.
Option (1) Market supply rises by 125 units, as the market supply curve shifts to the right. — 125 comes from taking 25 units per new firm.
Option (3) Market supply rises by 15 units, as the market supply curve shifts to the right. — 15 units is one firm’s output.
NCERT (2026-27): “4.6 Market Supply Curve The market supply curve shows the output levels (plotted on the x-axis) that firms in the market produce in aggregate corresponding to different values of the market price (plotted on the y-axis). … Consider a market with n firms: firm 1, firm 2, firm 3, and so on. Suppose the market price is fixed at p. Then, the output produced by the n firms in aggregate is [supply of firm 1 at price p] + [supply of firm 2 at price p] + … + [supply of firm n at price p]. In other words, the market supply at price p is the summation of the supplies of individual firms at that price.” “4.6 Market Supply Curve … It should be noted that the market supply curve has been derived for a fixed number of firms in the market. As the number of firms changes, the market supply curve shifts as well. Specifically, if the number of firms in the market increases (decreases), the market supply curve shifts to the right (left).” |