Maximizing profit: the oligopolist kinked demand curve model
Assume the attached graph depicts a firm that tries to maximize profits or minimize losses. Also assume this firm has fixed costs of $100. Some texts describe the above situation as an oligopoly engaged in cutthroat competition, while our text uses the term Sweezy oligopoly to describe this market situation. Answer the following questions on the above firm.
A. What is this firm's profit-maximizing output and price?
B. The firm has a marginal cost equation that is shown above as MC=$20+$1Q. Suppose something happens to cause that equation to change to MC=$15+$1Q. How does this change in the firm's cost structure change its profit-maximizing output and price? What practical implications for the firm's customers does your answer have?
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The solution discusses market outcomes for an Oligopoly facing the kinked demand curve. I solve for the profit maximizing level of output then show how this optimal level does or does not changed based on changing marginal costs, given a kinked demand curve scenario.
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