Question

The market demand curve for commodity X is qD = 700-p. Also assume the market consists of identical firms producing commodity X. Let the supply curve if a single firm be explained as:
qSf = 8+3p for p>20
= 0 for 0<p<20
a. What is the significance of p =20
Calculate the equilibrium quantity and number of firms at the equilibrium price of 20.

Answer 1

a. Here p is the break even point. if the firm is unable to meet the minimum of AVC i.e., p, then firm will not be able to meet its variable cost. so if firm is earning below that then firm should close down its operations. only if it is earning above that then it should continue. so p is the minimum level.

b. market demand =market supply

so, 700-p=no of firms(8+3p)

at equillibrium price of 20,

700-20=no of firms(8+3x20)

680=no of firms(68)

no of firms=680/68 =10

also qs=8+3p =8+3x20

=68