PI MC Pd D1 D2 01 Q2G3 Q4 Q5 Quantity 22. Refer to the graph shown. If a firm op

Question

PI MC Pd D1 D2 01 Q2G3 Q4 Q5 Quantity 22. Refer to the graph shown. If a firm operating as if it were faced with a kinked demand curve believes that if it lowers price from P2 to P, its rival will match the price cut: A. the demand curve used by the firm for decision making is highly elastic. it probably will lower price, since doing so will increase sales. C.,it probably won't lower price, since the percentage decline in price will exceed the percentage increase in quantity sold. D. Di is the relevant demand curve. 23. In the NAICS classification system, the broadest classification would be: a two-digit industry

Explanation / Answer

Because the demand curve is kinked. Mark the point where the D1 and D2 meet as "E". Above this point the D1 curve will be used and below this point, the D2 curve will be used.

When the price is decreased to P4 the quantity sold will be only Q4. The price has decreased a lot from p2 to P4 but the quantity increased is minimal from q3 to q4. By doing so the firm's output will not increase much but decreased price will cause a loss. So, the answer is "C".

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