Download Questions on the Dominant Firm/Competitive Fringe Model

Questions on the Dominant Firm/Competitive Fringe Model
1.
An industry consists of 11 firms. Ten of these firms are small firms that constitute
the "competitive fringe" of the market. These small firms all take as given the price
established by the single large firm in the industry. These 10 small price takers are
then free to supply whatever output they choose. The 11th firm is the large
dominant firm in the industry. This large firm sets the price for the industry. Each
of the 10 small firms has a total cost curve TC = 30 qi + 1.25qi2 for i running from 1 to
10; the dominant firm produces all the output it wishes with TC = 0.125q2 (i.e. TC =
1/8 q2). Total market demand for the good can be expressed as P = 750 - .75QT,
where QT is the total quantity of output in the industry.
Fill in the table below for this market equilibrium
Quantity
Price
Profit
produced
charged
Dominant
Firm
Total of
competitive
fringe
Total of all
firms
N.A.
Marginal
Cost of
production at
equilibrium
Marginal
Revenue at
equilibrium
N.A.
N.A.
2. In Question 1 above, the dominant firm has a “kinked” residual demand
curve. What is the two-part equation of this demand curve?
3. In Question 1, the marginal revenue curve of the dominant firm has two
parts. What is the two-part equation of this marginal revenue curve?
4. If the competitive fringe did not exist, the Dominant Firm would be a
monopolist facing the entire market demand curve. What would be the
equilibrium price and equilibrium quantity traded under these
conditions? Calculate the profit of this monopolist and the deadweight
loss.
5. What is the deadweight loss for the Dominant Firm/Competitive Fringe
model? Compare the price, output, profit and deadweight loss under
monopoly and under the dominant firm/competitive fringe model. Does
this comparison match your expectations based on the Structure-ConductPerformance paradigm? (a paradigm is a way of thinking, or a system of
thought).