In 2008, cruise ship lines announced they were increasing prices from $7 to $9 p

Question

In 2008, cruise ship lines announced they were increasing prices from $7 to $9 per person per day because of increased fuel costs. According to one analyst, fuel costs for Carnival Corporation's 84-ship fleet jumped $900 million to $2 billion in 2008 and its cost per passenger per day has jumped from $10 to $33. Assuming that these firms are oligopolistic and the outcome is a Nash-Cournot equilibrium LOADING..., why did prices rise less than in proportion to per-passenger-per-day cost? At the Cournot equilibrium, prices rose less than in proportion to per-passenger-per-day costs because

A. consumers are infinitely price sensitive.

B. the number of firms must have decreased.

C. marginal costs do not affect oligopoly prices.

D. only fixed costs affect oligopoly prices.

E. consumer demand is not perfectly inelastic

Explanation / Answer

The change in variable cost will shift the marginal cost curve. Firms may be reluctant to increase price as rivals would not match a price rise. It would require a shift in marginal cost by increase beyond the indeterminate range so as to increase the price. The answer is E.

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