James Pizzo is president of a firm that is the price leader in the industry; that is, it sets the price and the other firms sell all they want at that price. In other words, the other firms act as perfect competitors. The demand curve for the industry's product is P = 300 - Q, where P is the price of the product and Q is the total quantity demanded. The total amount supplied by the other firms is equal to Qr, where Qr =49P. (P is measured in dollars per barrel; Q, Qr and Qb are measured in millions of barrels per week.)
a. If Pizzo's firm's marginal cost curve is 2.96Qb, where Qb is the output of his firm, at what output level should he operate to maximize profit?
b. What price should he charge?
c. How much does the industry as a whole produce at this price?
d. Is Pizzo's firm the dominant firm in the industry?

Solution Preview

The point to note before answering the question is that price leadership does not imply quantity leadership, or in other words, price leadership does not imply that the price leader is the dominant firm.

Given,

Demand: P = 300 - Q
Other firms supply: Qr = 49P

In the price leadership model the price leader sets the price, lets other firms sell as much as they can, and then satisfies the remaining market. To find the numbers we need to first find ...

... If the price per unit of output is 62 cents per unit what will be the profit-maximizing output level? 12. ... Find the profit-maximizing output level graphically. ...

... Recall question 9, the high low method was used to ... is $12,500 + $5X where X = the volume of output. ... 18. Use the following to answer questions 18 - 20: Babson ...

... There are 2 questions on production theory, specifically on profit ... here is the price of the output and the ... your answer to the previous sub-question, find the ...

... What will be the rate of inflation? QUESTION 9: Use an appropriate diagram to show the impact of a favorable oil shock on output and price level. ...

... need some assistance understanding and completing some of the questions throughout my ... 94; when we double input X=Y=2, output = 188 = 2 ... 7.7 Optimal Input Level. ...

... when price increased from $3 to $5 in the previous question), because the ... for a Resource) Use the following data to answer the questions below. ... Units of Output. ...

... billion instead of 9111.11 billion as was the case in the first question. ... the AE curve by a bigger amount, and hence equilibrium level of output is higher. ...

... cost had been $100 rather than $60 and (2) total variable cost had been $10 less at each level of output. ... 8, study questions 2 and 11. ... 2 Key Question Suppose an ...

... in question 7b would be altered if (1) total fixed cost had been $100 rather than $60 and (2) total variable cost had been $10 less at each level of output. ...