In a dominant firm market, the dominant firm chooses its output level by:
A)setting price equal to marginal cost.
B)setting marginal revenue from the market demand curve equal to marginal cost.
C)setting marginal revenue from its residual demand curve equal to marginal cost.
D)identifying first a profit-maximizing price for its product subject to the price being charged by the competitive fringe.

Question

Quizplus · Accepted Answer

In a dominant firm market, the dominant firm faces a downward-sloping demand curve that is shifted leftward by the presence of a competitive fringe. Therefore, the dominant firm's marginal revenue curve will be below the market demand curve. The dominant firm will choose its output level where the marginal revenue from its residual demand curve (the demand curve it faces after the competitive fringe has satisfied its demand) equals marginal cost. This choice allows the dominant firm to maximize its profits while also taking into account the presence of the competitive fringe. Options A and B do not take into account the presence of the competitive fringe, and option D incorrectly implies that the dominant firm always sets prices first. In a dominant firm market, the dominant firm faces a downward-sloping residual demand curve, which is the market demand curve minus the demand of the competitive fringe. To maximize profit, the dominant firm should set marginal revenue from its residual demand curve equal to marginal cost, which determines the optimal output level. This strategy ensures that the dominant firm captures the maximum amount of profits without inducing too much entry or retaliation from the competitive fringe. Therefore, choice C is the correct answer.

In a Dominant Firm Market, the Dominant Firm Chooses Its