Question

The market demand curve for commodity X . Now, let us allow for free entry and...

The market demand curve for commodity X . Now, let us allow for free entry and exit of the firms producing commodity X. 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.

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Answer #1

a. P= 20 indicates that the minimum average cost of the firm is 20 and the firm will not supply or produce commodity X for any price less than 20.

Determination of equilibrium quantity- It can be determined by putting the value of equilibrium price of 20 in the market demand curve.

Qd = 700 -20 = 680 units

The number of firms can be determined by dividing the equilibrium quantity by quantity supplied.

qSf = 8+3*20 = 68 units

Number of firms= 680/68 = 10 firms

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