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InterviewSolution
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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. |
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Answer» (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"` |
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