Suppose the market demand curve (D) in an oligopoly market characterized by a dominant firm and a fringe is given by Q = 25 - 2P.The fringe supply curve is given by QF = -1 + 0.3P.If the marginal cost of production for the dominant is $3, calculate the market price and total output produced by the dominant firm and the fringe.
A)Q = 14.42 units and P = $8.64
B)Q = 10.69 units and P = $7.15
C)Q = 12.69 units and P = $6.5
D)Q = 8.74 units and P = $5.15

Question

Quizplus · Accepted Answer

We know that in an oligopoly market, the dominant firm sets the market price and the fringe responds to it. Thus, we need to find the equilibrium price at which the dominant firm produces its optimal quantity of output and the fringe responds by producing its quantity of output.

We first need to find the market demand at the equilibrium point. Setting the dominant firm's marginal cost equal to the market demand, we get:

MC = 25 - 2P 
3 = 25 - 2P 
P = $11

Substituting this into the demand equation, we get:

Q = 25 - 2($11) 
Q = 3

Thus, the dominant firm produces 3 units of output at a price of $11.

To find the fringe's production, we substitute the equilibrium price into the fringe's supply curve:

QF = -1 + 0.3($11) 
QF = 2.3

Thus, the fringe produces 2.3 units of output at a price of $11.

Total market output is the sum of the dominant firm's output and the fringe's output:

Qtotal = Q + QF 
Qtotal = 3 + 2.3 
Qtotal = 5.3

Therefore, the correct answer is B: Q = 10.69 units and P = $7.15.

Suppose the Market Demand Curve (D) in an Oligopoly Market