Q The dominant firm in the price leadership theory derives its demand curve by 1. simply...

Q The dominant firm in the price leadership theory derives its demand curve by

1.	simply taking the market demand curve as its own.

2.	at each price, plotting the difference between the dominant firm's demand curve and the horizontal sum of the MC curves of the fringe firms.

3.	at each price, plotting the quantity supplied of the fringe firms.

4.	at each price, plotting the difference between the market demand curve and the horizontal sum of the MC curves of the fringe firms.

Expert Solution

OPTION 4 IS CORRECT.

The dominant firm derives its demand curve at each price, plotting the difference between the market demand curve and the horizontal sum of the MC curves of the fringe firms.

The condition for the profit maximization are same as in the case of the perfect competition or the monopoly.

The reason is that the dominant firm controls the level of demand below the equilibrium price where the supply is less than the demand.

Rahul Sunny answered 2 years ago

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