Question
Dominant Firm Part 2. The cost function for a fringe firm is C(q) = cq2 . The marginal and average cost of the dominant firm
Dominant Firm Part 2. The cost function for a fringe firm is C(q) = cq2 . The marginal and average cost of the dominant firm is s. There are N fringe firms and all fringe firms are price takers. For what follows assume that demand is perfectly inelastic, denote it as Q. Think electricity! (a) Find the profit-maximizing price for the dominant firm. How does it depend on Q? Why? (b) Suppose that c = 1, s = 1, N = 6, and Q = 15. In addition assume that the dominant firm has a capacity constraint equal to K. Find the profit maximizing price and output of the dominant firm, as well as the output of the fringe when K = 4 and K = 8. Explain your results. (c) There are two states of the world, high demand and low demand. If demand is high Q h = 45 and if demand is low Q l = 15. i. Suppose that the firm has capacity of 21, but 3 units require maintenance. When would the firm schedule its maintenance? Why? Assume that all units that require maintenance must be repaired in the same period. ii. Suppose that the firm has capacity of 21, but 18 units require maintenance. When would the firm schedule its maintenance? Why? Assume that all units t
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