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Showing posts with label dominant firm. Show all posts
Showing posts with label dominant firm. Show all posts

2/3/12

How to solve dominant firm problems, a question and answer

18:54
How to solve dominant firm problems, a question and answer
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:

What is a Dominant Firm, or a Price Leadership Model?

17:45
What is a Dominant Firm, or a Price Leadership Model?
While dominant firm or price leadership models are not common in basic economic theory, there are some courses that do go over this concept.  It is a neat model, because it combines aspects from both a monopoly market and perfect competition.  The basic idea behind this model is that there is one large firm, that behaves monopolistically (meaning that it has a marginal revenue curve, and is not a price taker), and the rest of the firms are so small and numerous that they behave according to perfectly competitive rules.

The dominant firm is the price leader, and the rest of the firms take this price as given, and respond to it by producing at a quantity where marginal cost is equal to this price (which is also the marginal revenue for these "fringe" firms).