04 Jun Question A firm in an oligopolistic industry has
Question
A firm in an oligopolistic industry has identified two sets of demand curve. If the firm is the only one that changes price (i.e., other firms do not follow), its demand curve takes the form: Q = 82 – 8P (1) with MR = 10.25 – 0.25Q. If it is expected that competitors will follow the price action of the firm, however, the demand curve is of the form: Q = 44 – 3P (2) with MR = 14.66 – 0.66Q [from HW]
a. Find the price and the quantity at the intersection of two demand curve with a kink.
b. Identify the portions of the two demand curves, with “L shape above the kink” and the portion of the other two demand curves with “reverse L shape below the kink.”
Discuss the difference in implication behind the portions of two demand curves, one “L shape above the kink and the other “reverse L shape below the kink. Explain which one is considered to be “optimistic” and which one, “pessimistic” and why?
c. Calculate the range of marginal revenues on the vertical portion of the MR curves at the level of output where there is a kink
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