Suppose that the supply of the competitive fringe is perfectly elastic at p = p f . Suppose that there is a dominant firm with marginal cost per unit of cD with a capacity constraint of m¯ , where p f > cD . Let the demand curve be P = 100 - Q.
(a) Suppose that the constraint is not binding. For what values of cD will the dominant firm be an unconstrained monopolist?
(b) Suppose that the dominant firm's unit costs are greater than the maximum value found in (a), but still less than p f , and capacity is not constrained. What is the profit-maximizing price of the dominant firm?
(c) Suppose that p f = 60 and cD = 0. If the dominant firm is not capacity constrained, what is its optimal price?
(d) Suppose that m¯= 30, p f = 60, and cD = 0. Will the firm be a price maker? Will it earn monopoly profits? How much is a unit of its capacity worth? What are its Ricardian rents?
(e) Does the absolute cost advantage create a barrier to entry in (c)? In (d)?