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    Kinked demand curve - demand and forecasting

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    55. The Winston Tobacco Company feels that it is faced with the following segmented demand function for it cigarettes:

    P= 10- .10Q when 0≤ Q ≤ 20
    12- .20Q when Q > 20

    Where Q is the number of cartons sold and P is the price per carton.

    a. Why is such a segmented demand function likely to exists? What type of industry structure is indicated by this relationship?

    This is an example of kinked demand curve. Such type of demand curve exists when it is not possible for firms to increase or decrease price. If the firm increases its prices even by a small amount, other firms in the markets will not follow as they will gain sales by maintaining the same price level. So, increasing price would ...

    Solution Summary

    A kinked demand curve is assessed in the solution.

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