The figure given below represents the total output and price produced in an oligopoly market characterized by a dominant firm and a fringe.SF represents the supply curve of the fringe, D is the market demand curve, DRES represents the residual demand curve of the dominant firm, MRRES represents the residual marginal revenue curve of the dominant firm, and MCD represents the marginal cost of the dominant firm.

-Refer to Figure .If the dominant firm decides to maximize the present value of his future profits and threatens a price war:
A)new firms will not enter the oligopoly market.
B)new firms will enter the oligopoly market.
C)the market share of the existing fringe would increase.
D)the market share of the dominant firm would increase.

Question

The figure given below represents the total output and price produced in an oligopoly market characterized by a dominant firm and a fringe.SF represents the supply curve of the fringe, D is the market demand curve, DRES represents the residual demand curve of the dominant firm, MRRES represents the residual marginal revenue curve of the dominant firm, and MCD represents the marginal cost of the dominant firm.

-Refer to Figure .If the dominant firm decides to maximize the present value of his future profits and threatens a price war:

-Refer to Figure .If the dominant firm decides to maximize the present value of his future profits and threatens a price war:
A)new firms will not enter the oligopoly market. 
B)new firms will enter the oligopoly market. 
C)the market share of the existing fringe would increase. 
D)the market share of the dominant firm would increase.

Quizplus · Accepted Answer

If the dominant firm threatens a price war to maximize the present value of its future profits, it will lower its price to gain a larger market share. This will attract new firms to enter the market as the potential profit will increase due to the higher demand. Hence, more firms will enter the oligopoly market in response to the dominant firm's price-war strategy, leading to more competition and reducing the market share of the dominant firm. Therefore, the best answer is B.

The Figure Given Below Represents the Total Output and Price