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Consider an industry comprised of a dominant firm with a competitive fringe. Each firm produces a...

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Economics

Consider an industry comprised of a dominant firm with acompetitive fringe. Each firm produces a homogenous good. Marketdemand is given by Q=a-bp. The dominant firm has a constantmarginal cost c. There are three competitive fringe firms; eachcompetitive fringe firm i faces a marginal cost of c+qi, where isqi is the output of firm i.

a.) What is the dominant firm’s residual demand curve?

b.) What is the output and profit level of each firm?

c.) Suppose the dominant firm merges with one of the competitivefringe firms. What is the output and profit level of the dominantfirm after the merger? Do two firms have an incentive to merge?

Answer & Explanation Solved by verified expert
4.2 Ratings (538 Votes)
There are 3 competitive fringe firms with each of themhaving identical marginal cost functionshort run Supply curve is marginal cost curve offirmPart aPart b Dominant firm maximizes    See Answer
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