Harper Industries is the dominant firm in a six firm industry with a homogeneous
ID: 1106050 • Letter: H
Question
Harper Industries is the dominant firm in a six firm industry with a homogeneous product, which has a total market demand given by Q = 62 – P. Harper has competition from a fringe of five small firms that produce where their individual marginal costs equal the market price. The fringe firms each have total costs given by TCi = 25 + 8Qi + 2.5Qi2. If Harper’s total costs are given by TCH = 200 + 2QH+ 0.25QH2, what price will the dominant firm charge?
$16.00
$20.00
$22.00
$24.00
$33.00
$16.00
$20.00
$22.00
$24.00
$33.00
Explanation / Answer
Supply by fringe firms is MC = 8 + 5Q or 5Q = P - 8. Residual demand by dominant firm Q = 62 - P - P + 8
Q = 70 - 2P
P = 35 - 0.5Q
MR = 35 - Q
Equate MR and MC
35 - Q = 2 + 0.5Q
33 = 1.5Q
Q* = 22
P* = 35 - 0.5*22 = $24
Hence dominant firm charges a price of 24.
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