Suppose the market for ice-cream has one dominant firm and five small firms. The aggregate market demand for ice-cream is given by Q = 200 − P . Consider that the dominant firm is acting like a monopolist and all five small fringe firms are price takers. Dominant firm’s marginal cost (MC) of producing ice-cream is given as 10 and each small fringe firm has marginal cost M C = 10 + 2.5q where q =quantity of ice-cream. Dominant firm faces the residual demand which is the aggregate demand less of quantity supplied by all smaller fringe firms together. (a) Find the profit-maximising quantity produced and price charged by the dominant firm, and the quantity produced by each of the small fringe firms. (b) Find producer surplus of the dominant firm. (c) Suppose there are 10 small firms instead of 5. How does this change your results?

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