The market demand for a good rises from q = 200 - p to q = 260 - p. With a fixed number of firms, the market supply is q = 40 + p. With free entry and exit, the minimum average cost of firms is Rs 80.
A. With a fixed number of firms, the price rises to Rs 110.
B. With a fixed number of firms, the quantity rises to 150 units.
C. With free entry and exit, the quantity rises by 30 units.
D. With free entry and exit, the price stays at Rs 80.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → A, B and D only
With a fixed number of firms, a rise in demand raises both price and quantity. With free entry and exit, new firms come in until price is back at minimum average cost, so only quantity rises.
With fixed firms, before the rise:
\( 200 - p = 40 + p \)
\( 2p = 160 \)
\( p = 80 \)
\( q = 40 + 80 = 120 \)
A. With a fixed number of firms, the price rises to Rs 110. — Correct. From 260 − p = 40 + p, 2p = 220 and p = 110.
B. With a fixed number of firms, the quantity rises to 150 units. — Correct. q = 40 + 110 = 150.
C. With free entry and exit, the quantity rises by 30 units. — Incorrect. Price stays at Rs 80, so q = 260 − 80 = 180. The rise is 60 units, larger than with fixed firms.
D. With free entry and exit, the price stays at Rs 80. — Correct. Entry of new firms brings the price back to minimum average cost, Rs 80.
NCERT (2026-27): “5.1.2 Market Equilibrium: Free Entry and Exit … Thus, due to a shift in demand rightwards (leftwards), the equilibrium quantity and number of firms will increase (decrease) whereas the equilibrium price will remain unchanged. Here, we should note that with free entry and exit, shift in demand has a larger effect on quantity than it does with the fixed number of firms. But unlike with fixed number of firms, here, we do not have any effect on equilibrium price at all.” |