Question

a. Draw a pair of diagram illustrating both Short-run and Long Run equilibrium of Chamberlinian
monopolistic competition. The diagrams contain average cost, average variable cost, marginal cost, and
marginal revenue curves and shade area that represents abnormal profit. Make your diagrams large and
label all curves, axes, and points

b. In the price-leadership-by-a-dominant-firm model: a. After the dominant firm sets the market price, what
is the output-supply behavior of the remaining firms in the industry?

Answer 1

Short run equilibrium of Chamberlinian monopolistic competition:

Long run equilibrium of Chamberlinian monopolistic competition:

B) Price leadership by a dominant firm:

The remaining firms act as perfect competitors, their supply curve being the sum of their marginal cost curves, as indicated. The demand curve that the dominant firm is confronted with is measured by taking the quantity demanded from the production of the latter at each price as the difference between the quantity demanded on the market and the sum of the quantities supplied by the remaining firms at that price. Therefore, if the dominant firm sets the price at ?? ′ (or higher), the remaining firms supply the entire market ?′ (or less) and the dominant firm sells nothing. If the dominant firm sets the price at ?? ′′ (or lower), then the remaining firms supply nothing and the dominant firm supplies the entire market ?′′ (or more). The demand curve facing the dominant firm follows the red line from ?? ′ to a and then from a to the ? axis. The dominant firm’s marginal revenue curve is calculated in the usual manner. The dominant firm maximizes its profit at ?? where its marginal cost equals its marginal revenue. It sets the market price at the level ?? ? at which it can sell that output. The quantity sold on the market is ??. The remaining firms sell ?? = ?? − ??.