A large firm that is a price leader in an industry characterized also by many small competing firms estimates that the market demand for its product to be as follows: Q_m = 20,700 - 75P, where Q_m is units per month.
It expects small firms in the industry to supply output according to the following function: Q_s = 700 + 25P. What is the demand function for the large firm?

Question

Quizplus · Accepted Answer

The demand function for the large firm is found by subtracting the small firms' supply from the total market demand. The total market demand is given as 20,700 - 75P, and the small firms' supply is 700 + 25P. Subtracting the small firms' supply from the total market demand gives the large firm's demand: (20,700 - 75P) - (700 + 25P) = 20,000 - 100P.

A Large Firm That Is a Price Leader in an Industry