Business: The graph below illustrates two demand curves for a firm operating in a differentiated product oligopoly. Initially, the firm charges a price of $60 and produces 10 units of output. One of the demand curves is relevant when rivals match the firm’s price changes; the other demand curve is relevant when rivals do not match price changes.

The graph below illustrates two demand curves for

luis9527

21.08.2021

D2 is relevant when rivals match the firm’s price changes

D1 is relevant when rivals do not match the firm’s price changes

Explanation:

Given

See attachment for graph

Solving (a): Which is relevant to price changes

Calculate the slope of D1 and D2 using:

$m = \frac{y_2 - y_1}{x_2 - x_1}$

For D1

$(x_1,y_1) = (0,70)\\ (x_2,y_2) = (21,50)$

So:

$m = \frac{50- 70}{21- 0}$

$m = \frac{- 20}{21}$

$m_{D_1} = -0.9524$

For D2

$(x_1,y_1) = (0,100)\\ (x_2,y_2) = (20,20)$

So:

$m = \frac{20 - 100}{20 - 0}$

$m = \frac{-80}{20}$

$m_{D_2} = -4$

By comparison:

$|m_{D_2}| |m_{D_1}|$

i.e.

|-4| |-0.9524|

4 0.9524

This means that D2 is steeper than D1. Hence, D2 is relevant to price changes

Solving (b): Which is not relevant to price changes

In (a), we concluded that D2 is relevant to price change.

Hence, D1 is relevant when price does not change.

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