With free entry and exit in a perfectly competitive market, the equilibrium quantity is determined where:
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → the market demand curve meets the price line p = min AC
With free entry and exit, the price always equals the minimum average cost, so the price is the flat line p = min AC. The quantity is what buyers want at that price, read where the market demand curve meets this line.
Firms enter or leave until the market supplies whatever is demanded at that price, so the supply side does not fix the quantity here.
NCERT (2026-27): “5.1.2 Market Equilibrium: Free Entry and Exit … From the above, it follows that the equilibrium price will be equal to the minimum average cost of the firms. In equilibrium, the quantity supplied will be determined by the market demand at that price so that they are equal. Graphically, this is shown in Figure 5.5 where the market will be in equilibrium at point E at which the demand curve DD intersects the p0 = min AC line such that the market price is p0 and the total quantity demanded and supplied is equal to q0.” |