Question

market demand is given as QD = 40 – P. Market supply is given as QS = 3P. Each identical firm has MC = 5Q and ATC = 3Q. What is the number of firms in the market?

Answer 1

1.

Step 1:

For finding the equilibrium price:

The equality of market demand and market supply would give equilibrium price.

QD = QS

40 – P = 3P

3P + P = 40

4P = 40

P = 40/4 = 10.

The equilibrium price is 10.

Step 2:

For finding the equilibrium market quantity:

The above price has to be placed in either the market demand function or market supply function.

QD = 40 – P

       = 40 – 10

       = 30 = QS

The equilibrium market quantity is 30 units.

Step 3:

Each identical firm should produce at a point where (P = MC).

P = MC

10 = 5Q

Q = 10/5 = 2

Each firm should produce 2 units of output.

Step 4:

Market quantity should be divided by each firm’s quantity to get the number of firms in the market.

Number of firms = Market quantity / Each firm’s quantity

                            = 30 / 2

                            = 15

Answer: the required number of firms is 15.

Note: Average total cost (ATC) is not relevant here.