Considering the same demand curve as in exercise 22, 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 _f = 8 + 3p for p 20; = 0 for 0 p < 20.
What is the significance of p = 20?
The price p = 20 represents the minimum average cost (min AC) of the firms. With free entry and exit, firms will not produce below this price because they would incur losses and exit the market. It is the price below which the firm's supply is zero.
At what price will the market for X be in equilibrium? State the reason for your answer.
The market for X will be in equilibrium at price = Rs 20. The reason is that with free entry and exit of firms, the market equilibrium occurs at a price which equals the minimum average cost of the firms. At any price above Rs 20, new firms would enter, increasing supply and driving price down. At any price below Rs 20, firms would exit, reducing supply and driving price up.
Calculate the equilibrium quantity and number of firms.
Equilibrium Quantity = 680 units, Number of Firms = 10
Explanation
This question tests understanding of perfect competition with free entry and exit. The key insight is that under free entry and exit, equilibrium price must equal minimum average cost. The demand curve from Question 22 ( = 700 - p) is used with the single firm's supply curve to determine equilibrium quantity and number of firms.