Premium Essay

Dead Weight Lost

In: Business and Management

Submitted By dovgiianton
Words 389
Pages 2
There is an industry with a dominant firm and 100 firms that make up the competitive fringe. The 100 firms have identical cost curves. The industry demand curve is given by P = 1000 - .005Q. The total cost curve of each of the competitive fringe firms is TC = 600q + q2.

1. Find residual demand curve - dom firm.
2. MC of each comp fringe = 600+2q, firms produce so P=600=2q, 100 identical firms so q=.01Q substitute so P=600+2(.01Q)
3. Subtract CF supply from market demand to get res demand curve by dom firm. 2 points price at which CF producing to serve market, no residual demand, price below unwilling to supply
4. Point 1. 1000-.005Q=600+.02Q and solve
5. Point 2. CF supply crosses axis at Q=0 which is P=600 so 600=1000-.005Q or Q=80k
6. (920,0) and (600,8000) now so slope is (920-600)/80k=.004 and equation is P=920-.004Q
7. Quantities beyond 80k price less than 600 so P=1000-.005Q
8. Dom firm profit max is MR=MC, MR from residual demand. So MR=920-.008Q and MR=1000-01Q for Q>8000
9. IF MC=AC=500 then 920-.008Q=500 solve for dom firm so Q=52,500 and P=710 and profit is TR-TC=(710*52,500)-(500*52,500)
10. Competitive fringe would be 710=600+.02Q solve Q=5,500 so each produce 55 units. Profits are (710*55)- (600*55)+(55*55)

What is DW loss ass. With this?
MC=5 imagine dom firm supply whole market price of 500 so 1000-.005Q=500 the dom firm equilibrium was P=710 and production of 58,000 units total.
DW loss = (710-500)*(100,000-58,000)/2

Rather than charging lower price to drive out competitive fringe?
Highest price could not compete 600 for CF. So 100-.005Q=600 or Q=8000
TR-TC=(600*80k)-(500*80K) which results in lower profit

Difference from Monopoly model?
MR=MC so 1000-.01Q=500 or Q*=50,000
Monopoly Price 1000-.005(50k)=850
Profit = (750-50k)-(500*50k)

What happens lower costs say MC=AC=100
1000-.01Q=100 or Q*=90k and P*=450…...

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