Question

Happyland is one of five amusement parks on Sunshine Island. The following graph shows Happyland's kinked demand curve (D1D2) and the resulting marginal revenue curve (MR1MR2). The graph also shows two possible marginal cost curves (MCI and MC2). 

Answer 1

The equilibrium quantity is at point of intersection of MR Curve and MC curve. The point at which equilibrium quantity intersect demand curve is equilibrium price.

Therefore, Happyland will set a price of \(\underline{\mathbf{3 0}}\) per ticket.

According to kinked demand curve theory, if one firm \(\underline{\text { raises }}\) its price, other firms will not follow suit but if one firm \(\underline{\text { decreases }}\) its price, other firms will do likewise to retain their market share. Therefore, if Happyland decreases its price to below \(\$ 30\) per ticket, its competitors will also decrease the price.

The basic principle behind kinked demand curve theory stated above explains why the D2 portion of kinked demand curve is relatively \(\underline{\text { less }}\)elastic than D1 portion.

If Happyland's marginal cost decreases from MC1 to MC2 on the graph, Happyland would still sell at \(\$ 30\) per ticket. (It falls in the range).