Jones International University
Economic Theory and Application
Technical Questions: 1, 3 and 5 of Chapter 9 & 10
Chapter 9 1. The following graph: (not able to recreate, but in the text), shows a firm with a kinked demand curve a. What assumption lies behind the shape of this demand curve? The kinked demand curve assumes that other firms will follow price decreases and will not follow price increases. For instance, in an oligopoly model, based on two demand curves that assumes that other firms will not match a firm’s price increases, but will match its price increases. The kinked demand curve model of oligopoly implies that oligopoly prices tend to be “sticky” and do not change as …show more content…
c. Why is this called a cooperative game? This is a cooperative game because both players benefit from a cooperative solution; there is no incentive to cheat, the drivers do not want to wreck. There is no dominant strategy in this game because no single strategy is better in all cases.
A monopolist has a constant marginal and average cost of $10 and faces a demand curve of QD = 1000 – 10P. Marginal revenue is given by MR= 100 – 1/5 Q. a. Calculate the monopolist’s profit-maximizing quantity, price and profit. QD= 1000 – 10P or P = 100 – 1/10QD; MR= 100 – 1/5Q; MC =AC = 10. Set MR=MC .100 – 1/5Q= 101/5Q= 90Q= 450 Put quantity into the demand curve equation to find price. P = $55.Profit =TR– TC = (55)( 450) – (10)(450) = $24,750 –