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Maximizing Profit: The Oligopolist Kinked Demand Curve Model

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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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Assume the above 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 ...

Solution Summary

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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1. Discuss short and long run costs. For the short run discuss the relationship between cost theory and production theory and the concept of diminishing returns --- what is diminishing returns and how does it shape production and cost curves. Then, discuss the relationship between short run cost curves and long run cost curves. Finally discuss the concept of economics of scale and how long run costs curves shape the economic structure of industries.

2. Define the economic characteristics of the market structures (Perfect Competition, Monopolistic Competition, Oligopoly and Monopoly). Select ONE of the market structures and show how we can predict the short run and long run profit maximizing equilibrium positions with respect to quantity produced, price, total costs, total revenues and profits.

3. How do markets determine the payments to the various factors of production and determine the distribution of income? Explain.

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