At what level of price do the firms in a perfectly competitive market supply when free entry and exit is allowed in the market? How is equilibrium quantity determined in such a market?
When free entry and exit are allowed in a perfectly competitive market, the firms supply at a price level that equals the minimum average cost of the firms. This implies that in equilibrium, no firm earns supernormal profit or incurs a loss by remaining in production. If the price were above this level, new firms would enter, increasing supply and lowering the price; if below, firms would exit, raising the price.
The equilibrium quantity is determined at the level where market demand equals the market supply at this equilibrium price. At the price equal to the minimum average cost, the market supplies exactly the quantity that consumers demand, ensuring the market clears.
Explanation
The context under the section '5.1.2 Market Equilibrium: Free Entry and Exit' explicitly states that the assumption of free entry and exit implies the equilibrium price will be equal to the minimum average cost. It further explains that at this price, the market will supply a quantity equal to the market demand, which determines the equilibrium quantity.
Solution Steps
Step 1: Determine the equilibrium price, which settles at the minimum average cost due to the free entry and exit of firms preventing supernormal profits or losses.
Step 2: Determine the equilibrium quantity by finding the quantity where market demand matches supply at this specific price level.