Suppose perfectly competitive market conditions are characterized by the following inverse demand and inverse supply functions: P = 100 − 5Q and P = 10 + 5Q.The demand curve facing an individual firm operating in this market is:
A) P = 100 − 5Q.
B) a horizontal line at $9.
C) a horizontal line at $55.
D) P/N = (100 − 5Q)/N, where N is the total number of firms in the competitive market.

Question

Quizplus · Accepted Answer

In a perfectly competitive market, each firm is a price taker, meaning it cannot influence the market price and must accept the prevailing price as given. The demand curve facing an individual firm is therefore perfectly elastic, represented by a horizontal line at the market price.

To find the market price, we can set the inverse demand function equal to the inverse supply function:

100 - 5Q = 10 + 5Q

Solving for Q, we get Q = 9.

Substituting Q back into either equation gives us the market price:

P = 100 - 5(9) = 55

Therefore, the demand curve facing an individual firm is a horizontal line at $55, and the correct answer is C.

Suppose Perfectly Competitive Market Conditions Are Characterized by the Following