TUTORIAL 9

(MARKET STRUCTURE 3: OLIGOPOLY MARKET)

1. With the aid of diagrams, briefly describe why oligopoly firms have a kinked demand
curve.
Answer:
The theory of kink dd curve is based on 2 assumption:
• If an oligopolist reduces its price, its rivals will follow and cut their prices to prevent losing
the customers.
• If an oligopolist increases its price, its rival do not increase the price, thereby they gain
customers from the firm that increases the price.

The DD curve is kinked at point E & the price of P1. DD curve (D1) above the kink is
elastic because rival firms will not match the price increase. DD curve (D2) below the kink
is inelastic because the rival firms follow a price decrease.

2. Suppose an oligopoly firm faces two demand curves for price increase and price
decrease, respectively, as follows:

Q1 = 280 - 40P1 for price increase

Q2 = 100 - 10P2 for price decrease

The firm’s total cost function is TC = 2Q + 0.025Q2.

(a) Derive marginal revenue functions.

Answer:

Given info:
P1 = 7 – 0.025Q1
 TR1 = P1 x Q1 = 7Q1 - 0.025Q12
MR1 = dTR/dQ = 7 - 0.05Q1

P2 = 10 – 0.1Q2
TR2 = P2 x Q2 = 10Q2 - 0.1Q22
MR2 = dTR/dQ = 10 - 0.2Q2

(b) Calculate the price and quantity at the kinked point.

Answer:

At the intersection point of the two DD curves, P1 = P2 & Q1 = Q2

7 – 0.025Q = 10 – 0.1Q
0.075Q = 3
Q = 40

Substitute Q = 40 in P1 or P2 equation
P = 7 - 0.025(40) = 6

At the intersection point of the 2 DD curve: price is RM6, and quantity is 40 units.

(c) Determine the upper limit and the lower limit of marginal revenue in the market.
Answer:

The upper limit of MR = the value of MR1 when Q = 40.

From the answer in (a), MR1 = 7 - 0.05Q1 = 7 – 0.05(40) = 5.

The lower limit of MR = the value of MR2 when Q = 40.

From the answer in (a), MR2 = 10 - 0.2Q2 = 10 – 0.2(40) = 2.

The upper limit of MR is RM5, and the lower limit of MR is RM2.

(d) Derive marginal cost function. Calculate the value of MC when quantity is at the
kinked point.
Answer:
Given: TC = 2Q + 0.025Q2. MC = dTC/dQ = 2 + 0.05Q.
At the kinked point, the value of MC = 2 + 0.05(40) = 4

(e) If the firm’s marginal cost is as the answer in (d), calculate the profit maximizing price
and quantity.
Answer:
Since MC = 4 is located in between upper limit and lower limit of MR, Price = RM6
and Quantity = 40 units.

(f) Sketch a relevant diagram to support your answer.

Answer:
3. Discuss the differentiate of the following market
(a) Perfect competitive market
(b) Monopoly Market
(c) Oligopoly market
(d) Monopolistics Market

Answer:
Refer to text book.