Question

TRUE or FALSE: If each of 500 firms has an identical marginal cost curves of MC = Q the market supply curve is P = Q/500. Why or why not?

Answer 1

Answer: True

In the perfectly competitive market, each of 500 firms has an identical marginal cost curve function, which is shown below;

MC = q........(1)

In perfect competition, at the profit-maximizing output level, each firm's marginal cost(MC) equals the market price(P).

Now, if MC = P, then equation(1) will be,

P = q

Or, q = P..........(2)

Equation(2) is the supply curve of an individual firm in the market.

Now, as there are 500 firms in the market, the equation of the market supply curve(Q) will be as follows,

Q = 500 * q , where 'Q' is the total supply of 500 firms [q1 + q2 + q3 + ........+ q500]

Or, Q = 500 * P [ q = P]

Or, P = Q / 500

The market supply curve is 'P = Q/500'.

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