There is a cost efficient firm with the cost function: TC(q) = 0.5q. We will call this firm the dominant firm because it will NOT behave competitively. There are many small firms in the same market. These firms behave competitively, they choose their quantity under the assumption that the market price is given. Collectively their supply function is given by Sf(P) = 16 + 16P (if P > 1, 0 if otherwise). The market demand function is Q(P) = 22 4P.

A. In the Tuesday April 5 lecture we had this same example but with a different supply function of the small firms: It was Sf(P) = 8 + 8P in the lecture. How is this homeworks Sf(P) different? Can you describe it in your own words?

B. Compute the dominant firm equilibrium. What will be the price? How much output will the dominant firm produce? How much output will be produced by the small firms in total? What will be dominant firms market share? What will be the dominant firms L index? L = (P MC)/P