Question

1. Suppose a given market is characterized by the dominant firm with competitive fringe model, and assume the number of fringe firms is fixed. The inverse market demand curve is given by            P = 100 − Q, and the fringe’s inverse supply curve is given by P = 80 + Q.
   1. What is the shutdown price, p, for the fringe firms? How much do they produce at that price?
   2. What is the price at which the fringe firms can produce the full quantity demanded by consumers, p^∗? (Hint: if you are unsure where to start, try graphing the inverse demand and supply curves.)
   3. Suppose the dominant firm’s marginal cost is 70 + Q. What is the amount produced by the dominant firm? What price does it charge? (Hint: To find residual demand, first solve the inverse demand and supply curves for Q as a function of P so you have quantities on the right-hand side.)

Answer 1