a firm with a kinked demand curve experiences an increased fixed cost explain how the firm's price, output and profit change
To understand how a firm with a kinked demand curve would be affected by an increased fixed cost, let's first discuss the characteristics of a kinked demand curve.
A kinked demand curve is a model often used to explain oligopoly behavior, where a few firms dominate the market. It shows that when a firm raises its price, other firms in the industry don't follow suit and maintain their prices. This leads to a relatively elastic demand curve above the current price and a relatively inelastic demand curve below it.
Now, let's explore how an increased fixed cost would impact the firm's price, output, and profit:
1. Price:
When the firm faces an increased fixed cost, it needs to cover these additional expenses in order to maintain profitability. Since the kinked demand curve suggests that raising prices will not be met with a proportional response from competitors, the firm may decide to increase its price. The price increase aims to shift the demand curve above the kink, where the demand is relatively elastic, causing a smaller decrease in demand compared to the price increase.
2. Output:
Under the kinked demand curve model, the firm assumes that competitors will not follow its price increase, so it's likely to maintain its current output level. This is because reducing output would require lowering the price below the kink, which would result in a substantial reduction in demand due to the inelastic portion of the demand curve below the kink. Hence, the firm may prefer to maintain its existing output to avoid an excessively large drop in demand.
3. Profit:
The impact on the firm's profit when faced with an increased fixed cost would depend on the extent to which the price increase is successful in covering the added costs. If the firm's price increase manages to shift the demand curve above the kink and maintain a reasonable level of demand, it could potentially earn higher profits. However, if the demand is more elastic than anticipated or competitors respond aggressively with lower prices, the firm may experience a decline in profit.
In summary, when a firm with a kinked demand curve experiences an increased fixed cost, it may decide to increase its price to cover the additional expenses. The firm is likely to maintain its current output level, as reducing output could result in a significant drop in demand. The impact on profit will depend on the success of the price increase and the response from competitors.