Kinked Oligopoly

Question 1

First half of diagram (3)

Answer 1

Demand = AR
PED is elastic so AR is more horizontal
If a firm increases prices no one follows so consumers switch to alternatives = reduced demand

Question 2

Second hall of diagram (3)

Answer 2

PED is inelastic
If a firms chooses to decrease price everyone follows so demand doesn’t change a lot
Change in demand is small

Question 3

Where do firms operate

Answer 3

Profit maximising point = MR = MC
Firms have no incentive to move because an increase/decrease would lead to less revenue