Question

2. Consider a dominant firm in a market with a competitive fringe. The market demand curve is given by P = 100 − Q.The supply curve of the competitive fringe is perfectly elastic and given by P=Pf. The dominant firm has a marginal cost c where Pf > c

(a) For what value of Pf is the presence of the competitive fringe binding on the dominant firm?

(b) Suppose the dominant firm has c = 0 and the competitive fringe does not constrain the dominant firm at all (if you want to think about this numerically, suppose P F > 100). What are the profit-maximizing price and quantity of the dominant firm and the deadweight loss associated with market power in this industry?

(c) Suppose P F = 60 and c = 25. What are the profit-maximizing levels of price and quantity chosen by the dominant firm? What is the deadweight loss associated with market power in this industry?

Answer 1

Answer. 1. The market demand curve & given as. Ps 100-Q. where pf >c. rQs pf = p. At Equilibrum. Quantity demand = Quantity supplied. QS = GD p=100-Q & popri Qs = 100-Q 100-B-Q. 2Q = 100. =) Q = 50. P-100-50 -50. The value presence of of pf will range to o to so. competitive firm binding on dominana ib 1. = Marginal con "MC=178. Poslit Maximize. Marginal Revenue Mc=50 Тg : px6 = 100Q - Q?.

Alte derivative dylda MRD 100-20 100-20-50 2Q = 50 Q = 25. p = 100-25 = 75. At q= 25 profit is p=75 maxirum is occor. QS = 60 Qd = 100-p. profit Mani level 6=25 pf = 60 MRS Mc 100- 20 - 25 F 26 = 675 Q = 32.5. P: 10o- 100-32.5 pe 675.