7. Understanding the kinked demand curve model Happyland is one of five amusemen

Question

7. Understanding the kinked demand curve model Happyland is one of five amusement parks on Sunshine Isad. he following graph shows Happyland's kinked demand curve (D1 D2) and the resulting marginal revenue curve (MR1-MR2). The graph also shows two possible marginal cost curves (MC1 and MC2) 48 D1 40 MR1 32 MC2 MR2 D2 0 24 6810 12 QUANTITY Millions of ckets per year) Assume Happyland's marginal cost is represented by MC2. Happyland will set a price ofper ticket its price, other firms will do likewise to retain their market According to the kinked demand curve model, if one firm share, but if one firm price you just found for Happyland, its competitors will its price, other firm s will not follow suit. Therefore, if Happyland decreases its price to below the The basic principle behind the kinked demand curve model explains why the D2 portion of the kinked demand curve is relatively elastic than the D1 portion.

Explanation / Answer

Answer:

$40 per ticket

Reduces or decreases

Increases

Also decrease the price

Less Elastic

Explanation:

In oligopoly, profit maximization is achieved when marginal revenue = marginal cost

In this case, MC2 = MR2 and intersecting the demand curve, it is $40 price per ticket.

In oligopoly, firms are interdependent, it means that if one firm reduces the price, other firms will also reduce the price. But, if one firm increase the price other firms don’t follow it. It creates kinked demand curve. Further in oligopoly, as a part of D2 demand curve, decrease in price does not increase the market share or demand due to less elastic demand. But, in D1 demand curve, increase in price will cause strong reduction in demand. So, D1 is more elastic in nature.

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