Question

What is oligopoly? Explain the assumptions of an oligopolistic market (6 mks)

The government of Kenya imposes a binding quota of q* on steel imports. suppose the supply curve is relatively inelastic while the supply curve of foreign supplier is very elastic. use a figure to show the effect of the quota on the Kenya price of steel, the quantity of steel sold by Kenyan firms, and the total quantity sold within the country. 4mks

Answer 1

Oligopoly- is the type of market structure which is dominated by few firms producing certain good.

Assumptions of an oligopolistic market.

1. The product that dominates in the market is homogenous
2. The firms interdepend on each other in making decisions.
3. There are barriers to entry into the market
4. There is a lack of uniformity in the market size of firms.
5. There is the existence of price rigidity in the market.

Figure showing changes in demand and price.

Quotas are introduced to reduce the imports to a country thus helping domestic suppliers. This may lead to an increase in the domestic price of steel thus leading to retaliating of domestic welfare of Kenya as shown in the attached figure below.