A market contains a group of identical price taking firms. Each firm has a margi

Question

A market contains a group of identical price taking firms. Each firm has a marginal cost curve SMC(Q) = 2Q, where Q is the annual output of each firm. A study reveals that each firm will produce if the price exceeds $20 per unit and will shut down if the price is less than $20 per unit. The market demand curve for the industry is D(P) = 240 ? P/2, where P is the market price. At the equilibrium market price, each firm produces 20 units. What is the equilibrium market price, and how many firms are in this industry?

Explanation / Answer

let no. of firms be n

at equilibrium

MC=market price

=> 2Q=P.....................(i)

Also demand = supply at equilibrium

=>240*(P/2) = n*Q.......(ii)

from (i) and (ii)

n=240

since Q=20 units

=> P=2Q=$40

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