13. Understanding the kinked demand curve theory Aa Aa Happyland Is one of five
ID: 1200483 • Letter: 1
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13. Understanding the kinked demand curve theory Aa Aa Happyland Is one of five amusement parks on Sunshine Island. The following graph shows Happyland's kinked demand urve (D1D2) and the resulting marginal revenue curve (MR1MR2 he graph also shows two possible marginal cost curves (MC1 and MC2). PRICE AND COSTS (Dollars per ticket) 72 01 60 MR1 48 36 MC1 24 12 02 MR2 QUANTITY (Malions of tickets per yearl Assume Happyland's marginal cost is represented by MC2. Happyland will set a price of per ticket. According to the kinked demand curve theory, if one firm their market share, but if one firm Increases its price to above $60 per ticket, its competitors will its price, other firms will do likewise to retain its price, other firms will not follow suilt. Therefore, if Happyland The basic principle behind the kinked demand curve theory stated above explains why the D2 portion of the kinkedExplanation / Answer
a) Price: 20
According to the kinked demand curve theory, if one firm reduces its price, other firms will do likewise to retain their market share, but if one firm raises its price other firms will not follow the suit. Therefore, if Happyland increases its price to above $60 per ticket, its competitiors will not increase the ticket.
The basic principle behind the kinked demand curve theory stated above explain why the D2 portion of the kinked demand curves is relatively less elastic that the D1 portion. If Happyland's marginal cost increases from MC2 to MC1, the Happy land would produce 4 units at $30.
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