question archive The Competitive Fringe: Consider a market with one large firm and many small firms
The Competitive Fringe: Consider a market with one large firm and many small firms
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The Competitive Fringe: Consider a market with one large firm and many small firms. The supply curve of the small firms taken together is S(p)=100+pS(p)=100+p. The market demand curve for the product is D(p)=200−pD(p)=200−p. The cost function for the large firm is c(y)=25yc(y)=25y. Suppose that the large firm is forced to operate at a zero level of output. What will be the equilibrium price? What will be the equilibrium quantity?
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Equilibrium price is 50, and equilibrium quantity is 150.
If the large firm is forced to produce zero output, then the market essentially is one with perfect competition, in which every small firm takes price as given. Therefore, the equilibrium price is determined by the intersection of the demand curve and supply curves, i.e., 200 - p = 100 + p, or p = 50, and S(p) = D(p) = 150.
