Describe the effect of rising costs in an oligopolistic market on the price paid by consumers.

Expert Solution

Answer : In oligopolistic market the demand curve is kinked. In case of kinked demand curve the marginal revenue curve is discontinuous at certain portion. In oligopolistic market at profit-maximizing output level, marginal revenue = marginal cost and at that output level price = demand. If marginal cost curve intersect the marginal revenue curve at it's discontinuous portion then the profit-maximizing output level and price level does not change. There occur no effect on price if cost rise or fall. But if the marginal cost curve intersect the marginal revenue curve except it's discontinuous portion then the profit maximizing-output level and price level will change. So, in oligopolistic market the consumers's paid price level depends on the intersection point of marginal cost curve and marginal revenue curve curve. When cost rise then the marginal cost rise. If marginal cost curve intersect the marginal revenue curve at it's discontinuous portion then the consumers's paid price level does not change when price rise. But if marginal cost curve intersect the marginal revenue curve above it's discontinuous portion then the consumers's paid price level will increase if cost rise.

Rahul Sunny answered 1 year ago

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