Suppose the demand function in the industry is p = 100 - y and each firm has a constant marginal cost of $40. Suppose there is a monopoly firm and a potential entrant. The residual demand is given by:
A)y = 70 - 2p.
B)y = 70 - p.
C)y = 60 - p.
D)y = 60 - 2p.

Question

Quizplus · Accepted Answer

To find the residual demand, we first need to find the total output of the industry. Since the monopoly firm has constant marginal cost of $40, it will produce where marginal revenue equals marginal cost:
MR = 100 - 2y = MC = 40
Solving for y, we get:
y = 30
Therefore, the total output of the industry is y = 30.
The potential entrant will enter the market only if it can make a positive profit. For that, it needs to charge a price that is lower than the monopoly price, and also cover its marginal cost. The potential entrant's profit-maximizing price is given by:
MC = P - (1/2)(100 - y)
Solving for P, we get:
P = 70 - (1/2)y
Substituting y = 30, we get:
P = 55
The monopoly price is given by:
MR = 100 - 2y = P
Solving for P, we get:
P = 70
Therefore, the residual demand is given by:
y = 70 - P = 70 - 55 = 15
Hence, the best choice is B.

Suppose the Demand Function in the Industry Is P =