The Competitive Fringe: Consider a market with one large firm and many small firms. The supply curve of the small firms taken together is S(p) = 100 + p. The market demand curve for the product is D(p) = 200 − p. The cost function for the large firm is c(y) = 25y.
(a) Suppose that the large firm is forced to operate at a zero level of output. What will be the equilibrium price? What will be the equilibrium quantity?
(b) Suppose the large firm tries to exploit its market power by setting a profit maximizing price. In order to model this we assume that customers always go first to the competitive firms and buy as much as they are able to and then go to the large firms. In this situation, determine the large firm’s residual demand curve, and use this to find the equilibrium price, the quantity supplied by the large firm, and the equilibrium quantity supplied by the competitive firms. What will be the large firm’s profits?