Suppose that a competitive fringe produces with costs given by C = 3q f so that MC = 3 represents the fringe supply curve. Demand is given by P = 10 - Q and the dominant firm's costs are given by C = 2qd . Suppose also that capacity for the dominant firm cannot be expanded beyond qd ≤ 5.
(a) Compute the dominant firm's profits in equilibrium.
(b) Suppose that the dominant firm is able to cause an increase in the fringe's marginal costs of $1. Compute the change in the dominant firm's profits.
(c) Finally, suppose that raising rivals' costs causes an increase in the dominant firm's average costs to 2.75. What is the net effect now on the dominant firm's profits.