Scenario 12.2:
You are studying a market for which the kinked demand curve model applies. The kinked demand curve is as follows:
Q = 1200 - 5P for 0 $\impliedby$ Q

Question

Scenario 12.2:
You are studying a market for which the kinked demand curve model applies. The kinked demand curve is as follows:
Q = 1200 - 5P for 0 $\impliedby$ Q < 150
Q = 360 - P for 150 $\impliedby$ Q
The marginal cost is given as:
MC = Q
-Refer to Scenario 12.2. Suppose that the marginal cost increases such that:
MC = Q + 10
What is the profit maximizing level of output?

Quizplus · Accepted Answer

To find the profit-maximizing level of output, we must first determine the firm's reaction function. The reaction function shows how the firm will adjust its quantity supplied in response to a change in price, assuming that its competitors will not change their prices.

For prices below the kink, the reaction function will be based on the first part of the demand curve:

Q = (1/5)(1200 - P)

For prices above the kink, the reaction function will be based on the second part of the demand curve:

Q = 360 - P/5

To find the profit-maximizing level of output, we need to determine where these two reaction functions intersect.

Setting the two reaction functions equal to each other, we get:

(1/5)(1200 - P) = 360 - P/5

Solving for P, we get:

P = 150

Substituting this value of P into either reaction function, we get:

Q = 150

Therefore, the profit-maximizing level of output is 150 units.

With the increased marginal cost of Q + 10, we simply subtract 10 from our optimal quantity:

Q = 140

Thus, the new profit-maximizing level of output is 140 units.

Scenario 12 ⟸ \impliedby⟸ Q < 150 Q = 360 - P for 150

Scenario 12 $\impliedby$ Q < 150
Q = 360 - P for 150