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 falls such that:
MC = Q - 10
What is the profit maximizing level of output?

Quizplus · Accepted Answer

Under the kinked demand curve model, the profit maximizing output level occurs where marginal cost equals the marginal revenue of the upper portion of the demand curve. At the kink point (P=90), there is a discontinuity in marginal revenue, so the firm assumes that its rivals will not match any price increase above this point but will match any price decrease below this point. 
With a marginal cost of MC = Q - 10, the new marginal revenue for the upper portion of the demand curve becomes MR = 360 - 2Q. Setting MR = MC, we get Q = 150. Thus, the profit maximizing level of output is 150.

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

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