This post is going over the economics of a dominant firm problem using algebra and math. For more information on the economic theory of a dominant firm or price leader model go here. The actual question being solved is:

In the model of a dominant firm, assume that the fringe supply curve is given by Q= -1+0.2P, where P is market price and Q is output. Demand is given by Q=11 –P. What will price and output be if there is no dominant firm? Now assume that there is a dominant firm, whose marginal cost is constant at $6. Derive the residual demand curve that it faces and calculate its profit-maximizing output and price.

In order to solve this you need to follow these steps:

In the model of a dominant firm, assume that the fringe supply curve is given by Q= -1+0.2P, where P is market price and Q is output. Demand is given by Q=11 –P. What will price and output be if there is no dominant firm? Now assume that there is a dominant firm, whose marginal cost is constant at $6. Derive the residual demand curve that it faces and calculate its profit-maximizing output and price.

In order to solve this you need to follow these steps: