Question

The market demand curve for commodity X is `q^(D)=700-p`. 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 of a single firm be explained as:
`q_(t)^(S)=8+3p " for "pge20`
`=0 " for "0le p lt 20`
(a) What is the significance of p = 20?
(b) Calculate the equilibrium quantity and number of firms at the equilibrium price of rupee 20.

Answer 1

(a) P = 20 indicates that the minimum average cost of the firm is rupee 20 and the firm will not supply or produce commodity X for any price less than rupee 20.
(b) Determination of Equilibrium Quantity: It can be determined by putting the value of equilibrium price of rupee 20 in the market demand curve. `q^(D)` or Equilibrium Quantity=700-20=680 units.
Determination of Number of Firms: The number of firms can be determined by dividing the equilibrium quantity by quantity supplied by each firm. Quantity supplied by a single firm. Quantity supplied by a single firm can be calculated by putting the value of equilibrium price of rupee 20 in the supply curve.
`q_(t)^(S)=8+3xx20=68` units.
Quantity supplied by each firm will be 68 units as there are identical prodcunig commodity X.
`"Number " "of" " Firms"=("Equilibrium Quantity")/("Quantity Supplied by Each Firm")=(680)/(68)=10 " Firms"`