Question

The demand function for an oligopolistic market is given by the equation, Q = 275 – 4P, where Q is quantity demanded and P is price (Note: inverse demand for the dominant firm here is P = 50 - .2Q). The industry has one dominant firm whose marginal cost function is: MC = 12 + 1.2QD, and many small firms, with a total supply function: QS = 25 + P. In equilibrium, the total output of all small firms is _____

Answer 1

The dominant firm would be the one to set the price. Its inverse demand is given (correctly) as . The total revenue of the dominant firm would be , and the marginal revenue would be or . The dominant firm would produce where the or or or . This is the quantity produced by dominant firm. They would set the price as or dollars.

The small firms would then produce at this same price, and their total output would be units. Hence, the total output of all small firm is 70.25 units.