Question

1. Check all the following that are true.

		Oligopolies have a perfectly elastic demand curve
		Oligopolies have an elastic demand above the prevailing price
		Oligopolies have an inelastic demand below the prevailing price
		the prevailing oligopoly price is at the intersection of the elastic and inelastic portions of the kinked demand curve

2. Check all the following that lead to cost inefficiencies in monopoly.

		operating inefficiency
		costs of government regulation
		rent-seeking behavior
		competition with other firms
		income concentration
		charging at the lowest point of their ATC curve
		risk avoidance behavior

3. Check all of the following that apply to oligopolies.

		with an inelastic demand and a price decrease, total revenue will decline.
		the demand curve is inelastic above the prevailing price because other firms do not follow the price increase and buyers purchase from the lower-priced competitors
		a firm that raises its price above the prevailing price has a decrease in total revenue
		the demand below the prevailing price is inelastic because firms will be forced to follow a price decrease and therefore, no single firm will benefit from lower prices.

4. Check each of the following that apply to oligopolies.

		MR curve will break into two segments because of the kinked demand curve
		firms will be assured of frequent price changes and increased competition in order to make an expected return
		Firms that require a large capital investment benefit
		there is neither government control nor efficiency

Answer 1

1. The prevailing oligolpoly price is at the intersection of elastic and inelastic portions of kinked demand curve.

3. The demand below the prevailing price is inelastic behaviour because firms will be forced to follow a price decrease and therefore no single firm will benefit from lowering the price.

4. The MR curve will break into two segments because of kinked demand curve

The assumption is that when the price is increased by a firm, the trend is not followed by the other firms, but if the price is decreased by a firm them other firms will follow the trend. Due to this increase in price makes an elastic demand and decrease in price makes an inelastic demand. Due the kinked demand curve the marginal revenue curve also is kinked. As there is a kink in the demand curve, there is a gap in the MR curve. In this region, the firms will increase the price for the same quantity inorder to maximize the profit.