Happyland is one of five amusement parks on Sunshine Island. The following graph

Question

Happyland is one of five amusement parks on Sunshine Island. The following graph shows Happyland's kinked demand curve (D1-D2) and the resulting marginal revenue curve (MR1-MR2). The graph also shows two possible marginal cost curves (MC1 and MC2) 60 D1 50 MR1 40 30 MC1 20 MC2 10 D2 MR2 18 QUANTITY (Millions of tickets per year) 30 36 Assume Happyland's marginal cost is represented by MC1. Happyland will set a price of per ticket. According to the kinked demand curve model, if one firm its price, other firms will do likewise to retain their market share, but if one firm its price, other firms will not follow suit. Therefore, if one of Happyland's competitors decreases its price to below the price you just found for Happyland, Happyland will The basic principle behind the kinked demand curve model explains why the D2 portion of the kinked demand curve is relatively than the D1 portion. elastic If Happyland's marginal cost decreased from MC1 to MC2 on the graph, Happyland would

Explanation / Answer

Marginal cost = MC1

Happyland will set a price of $50 per ticket (price corresponding to the quantity where MR = MC)

Kinked demand curve model:

If one firm lowers its price, other firms will do likewise to retain their market share, but if one firm increases its price, other firms will not follow suit. Therefore, if one of Happyland's competitors decreases its price to below the price you just found for Happyland, Happyland will follow suit and decrease its price.

D2 portion of the kinked demand curve is relatively less elastic than the D1 portion.

If Marginal cost = MC2, Happyland would still charge the same price i.e. $50 per ticket.

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