Maria Van Gelder
Jones International University
Economic Theory and Application
Assignment 4.1
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…
Marginal cost is the additional cost of producing an additional unit of output. Marginal cost shows the changes in costs as output changes. Total variable costs change as the level of output varies but total fixed costs are constant regardless the level of output. Therefore, total fixed costs do not influence the marginal costs of production and actually average fixed costs decreases continuously as more output is produced. Because total fixed cost is constant, average fixed cost must decline as output increases ad spreads the total fixed cost is constant over a larger number of units of output. Both average variable cost and average cost first decrease and then increase.
2. Some games of strategy are cooperative. One example is deciding which side of the road to drive on. It doesn’t matter which side it is, as long as everyone chooses the same side. Otherwise, everyone may get hurt.
| | | | |Driver 2 | |
| | |left | |right | |
|driver 1 |left |0 |0 |-1,000 |-1,000 |
| |right |-1000 |-1,000 |0 |0 |
a. Does either player have a dominant strategy? No strategy is better in all cases, since they both can have the same strategies in all
This graph is specific to an oligopoly and shows the change in quantity demanded in relation to the change in price for both elastic and inelastic goods. Total Revenues will be increased, if the firm decreases their price but increase their quantity. Due to the fact that the costs remain the same, the revenue line on the graph can be seen to be steeper than the costs meaning that the profit is higher. The graph therefore also indicates the point where the firm is able to make the most amount of profit, in relation to the price they set and the quantity they produce.
In real life, the theory cannot provide a straightforward strategy used by the competitor or to be used against the competitor because it is not clear what strategy the competitor has chosen (Li & Yu,2016).
Imagine that you have decided to open a small ice cream stand on campus called "Ice-Campusades." You are very excited because you love ice cream (delicious!) and this is a fun way for you to apply your business and economics skills! Here is the first month's scenario--you order the same number (and the same variety) of ice creams each day from the ice cream suppliers, and your ice creams are always marked at $1.50 each. However, you notice that there are days when ice creams remain unsold but other days when there are not enough ice creams for the number of customers.
While the strategy may
The law of demand is graphically demonstrated by a(n) a.perfectly vertical demand curve.b.perfectly horizontal demand curve.c.downward-sloping demand curve.d.upward-sloping demand curve.e.curved demand line. ANS
In a real sense, it cannot give a correct strategy that can be taken by the competitor because a competitor is flexible to change their decision any time depending on the goals intended. It also does not explain the reasons behind opting for a certain strategy (Li & Yu, 2016).
The Marginal Cost graph intersects the Average Total Cost graph and the Average Variable Cost graphs at their minimum points. As long as the cost of producing one additional unit remains less than average total cost, the average total cost continues to fall. When marginal cost finally exceeds average total cost, average total cost begins to rise in response. The same effect applies to the relationship between marginal cost and average variable cost.
2.) Which curve(s) change and based on the lists in the text of what causes demand and supply to shift what are the causes of theses shifts? D1 changed moving leftward indicating a decrease in demand due to a technological change: a technological setback causes a decrease. This causes price to go down as well as the demand is lower.
| An oligopolist that faces a kinked demand curve is charging price P = 6. Demand for an increase in price is Q = 280 40P and demand for a decrease in price is Q = 100 10P. Over what range of marginal cost would the optimal price remain unchanged?Answer
27. Explain why the marginal revenue curve for a monopolist lies below its demand curve, rather than coinciding with the demand curve, as is the case for a perfectly competitive firm. Is it ever possible for a monopolist’s marginal revenue curve to coincide with its demand curve?
1) According to the Law of Demand, the demand curve for a good will A) shift leftward when the price of the good increases. B) shift rightward when the price of the good increases. C) slope downward. D) slope upward. Answer: C 2) An increase in the price of pork will lead to A) a movement up along the demand curve. B) a movement down along the demand curve. C) a rightward shift of the demand curve. D) a leftward shift of the demand curve. Answer: A 3) An increase in consumer incomes will lead to A) a rightward shift of the demand curve for plasma TVs. B) a movement upward along the demand curve for plasma TVs. C) a rightward shift of the supply curve for plasma TVs. D) no change of the demand curve for plasma TVs. Answer:
In oligopoly market, each firm has substantial market power with high degree of interdependence. The key for success in a oligopoly market is to gain more market share than the competitors. Increasing the price can lead to loss of market share to the competitors, so in the oligopoly market, if a firm decreases the price, the other firms will always follow, but if a firm increase the price, the other firms will not follow. The demand curve is kinked.
The demand curve shows what happens to the quantity demanded of a good when its price varies, holding constant all the other variables that influence buyers. When one or more of these other variables changes, the demand curve shifts leading to an increase or decrease in demand. The table below lists all the variables that influence how much consumers choose to buy cigarettes.4