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Question
The market for an industrial chemical has a single dominant firm and a competitive fringe comprised of many firms that behave as price takers. The dominant firm has recently begun behaving as a price leader, setting price while the competitive fringe follows. The market demand curve and competitive fringe supply curve are given below. Marginal cost for the dominant firm is $0.75 per gallon.QM = 140,000 - 32,000P
QF = 60,000 + 8,000P,
where QM = market quantity demanded, and QF = the supply of the competitive fringe. Quantities are measured in gallons per week, and price is measured as a price per gallon.
a. Determine the price and output that would prevail in the market under the conditions described above. Identify output for the dominant firm as well as the competitive fringe.
b. Assume that the market demand curve shifts rightward by 40,000 units. Show that the dominant firm is indeed a price leader. What output (leader and follower) and market price will prevail after the change in demand?
Answer
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