Economic Theory and Application Essay

1. The following chart ( non able to recreate, exactly in the text), shows a firm with a kinked demand curve a. What assumption lies git the shape of this demand curve? The kinked demand curve assumes that other firms entrust follow bell decreases and masturbate out not follow price increases. For instance, in an oligopoly model, based on two demand curves that assumes that other firms will not match a firms 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 much as they would in other marketplace structures given the assumptions that a firm is fashioning about the behavior of its rival firms. Kinked demand was an initial attempt to excuse sticky prices. It is an economic theory regarding oligopoly and monopolistic competition.b. Identify the firms profit-maximizing output and price. In Figure 9.1 in the textbook, the firms profit-maximizing output and price is w hen there is an increase in price over the reasonable peripheral make up (the difference between p1 and the superman vertically down from there that cuts the MC curve) Profit maximization is the unconscious process by which a firm determines the price and output aim that returns the greatest profit. There are several approaches to this definition. The total revenue total greet method relies on the particular that profit equals revenue minus cost, and the marginal revenue marginal cost method is based on the fact that total profit in a perfectly competitive market reaches its maximum refer where marginal revenue equals marginal cost. c. Use the graph to explain why the firms price is likely to repose the same, even if marginal be change. If marginal costs increase or decrease within the discontinuous range of the marginal revenue curve, the point at which marginal revenue equals marginal cost will anticipate the same.Thus, price and output do not change, even though cost s (and profits) are different. Marginal cost is the additional cost of producing an additional building block of output. Marginal cost shows the changes in costs as output changes. follow 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 forever 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 large 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 and only(a) example is deciding which side of the road to drive on. It doesnt effect which side it is, as long as everyone chooses the same side. Otherwise, everyone may get hurt.