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Chapter 10: Q. 17 (page 252)

Would you expect the kinked demand curve to be more extreme (like a right angle) or less extreme (like a normal demand curve) if each firm in the cartel produces a near-identical product like OPEC and petroleum? What if each firm produces a somewhat different products? Explain your reasoning.

Short Answer

Expert verified
  • The kinked demand curve would be more dramatic if each business in the cartel produced a near-identical commodity, such as OPEC and petroleum.
  • If each firm produces a somewhat different products, the kinked demand curve would less extreme.

Step by step solution

01

Step 1. Assumption of kinked demand curve in oligopoly

An oligopoly firm faces a demand curve with a kink at the price level, with the curve being more elastic over the kink and less elastic below it.

02

Step 2. Reason for more extreme kinked demand curve

The kinked demand curve would be more extreme if the firms in the crtel were producing goods that were close substitutes. This is because in case of a price changes, the consumers can easily move to the firm selling at a lower cost.

03

Step 3. Reason for less extreme kinked demand curve

If each firm produces somewhat different products, then consumers may not easily shift to the other product because of the differentiation and angle of the kink will be less.

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Most popular questions from this chapter

Sometimes oligopolies in the same industry are very different in size. Suppose we have a duopoly where one firm

(Firm A) is large and the other firm (Firm B) is small, as the prisoner鈥檚 dilemma box in Table 10.4 shows.


Firm B colludes with firm AFirm B cheats by selling more output
Firm A colludes with firm B
A gets \(1000,B gets \)100A gets \(800, B gets \)200
Firm A cheats by selling more outputA gets \(1050, B gets\)50A gets \(500, B gets \)20

Assuming that both firms know the payoffs, what is the likely outcome in this case?

Will the firms in an oligopoly act more like a

monopoly or more like competitors? Briefly explain.

Mary and Raj are the only two growers who provide organically grown corn to a local grocery store. They know that if they cooperated and produced less corn, they could raise the price of the corn. If they work independently, they will each earn \(100. If they decide to work together and both lower their output, they can each earn \)150. If one person lowers output and the other does not, the person who lowers output will earn \(0and the other person will capture the entire market and will earn \)200. Table 10.6represents the choices available to Mary and Raj. What is the best choice for Raj if he is sure that Mary will cooperate? If Mary thinks Raj will cheat, what should Mary do and why? What is the prisoner鈥檚 dilemma result? What is the preferred choice if they could ensure cooperation? A = Work independently; B = Cooperate and Lower Output. (Each results entry lists Raj鈥檚 earnings first, and Mary's earnings second.)

RAJ MARY
(A) (B)
(\(100,\)100) (\(200,\)0)
(\(0,\)200) (\(150,\)150)

Suppose that, due to a successful advertising campaign, a monopolistic competitor experiences an increase in demand for its product. How will that affect the price it charges and the quantity it supplies?

Does each individual in a prisoner鈥檚 dilemma benefit more from cooperation or from pursuing self-interest? Explain briefly.
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