In a perfectly competitive market, the demand curve is as follows
qD = 150 p for 0 ?p ? 150
= 0 for p > 150
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 quantity will be?
Answer & explanation
Correct answer: option 2
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 25. 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
150 p = 150 25 = 125.