Describe the essential features of the kinked-demand model of oligopoly pricing
What will be an ideal response?
In the kinked-demand model, there is no collusion. The demand curve for the oligopoly is “kinked” because when the firm lowers its price, its rivals will lower their prices, and its demand often will be inelastic. When the firm increases its price, its rivals will not follow with price increases and its demand will be elastic. The firm, therefore, hesitates to change its price for fear of decreasing its profits. Two shortcomings of the kinked-demand model are that it does not explain how the going price gets set and prices are not as inflexible as implied by the model.
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Refer to Scenario 15-5. How much additional profit can the airline earn by charging each customer their willingness to pay relative to charging a flat price of $600 per ticket?
a. $15,000 b. $25,000 c. $40,000 d. $70,000
If the Fed lowers the inflation rate and initially expected inflation does not change, in the short run the unemployment rate ________, and in the long run the unemployment rate ________ the natural unemployment rate
A) does not change; is greater than B) rises; is greater than C) falls; is equal to D) rises; is equal to E) does not change; is equal to
If the cross-price elasticity of demand between good x and good y is 0.4, then
a. the demand for good x is highly responsive to changes in the price of good y b. a 10 percent increase in the price of good y leads to a 0.4 percent increase in the quantity demanded of good x c. a 10 percent decrease in the price of good y leads to a 4 percent decrease in the demand for good y d. good x and good y are complements e. good x is a normal good and good y is an inferior good
In the Keynesian model, an increase in government purchases affects output by
A. increasing the real interest rate due to crowding out, reducing aggregate demand. B. increasing aggregate demand as national saving declines. C. increasing saving to pay for future taxes, lowering the real interest rate and shifting the IS curve to the left. D. increasing labor supply, because workers feel effectively poorer.