Multiple Choice
For a firm operating under the kinked demand model, the profit-maximizing quantity occurs at the point where:
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14. Oligopoly
Kinked-Demand Theory
Multiple Choice
An oligopoly firm's demand curve will be kinked if:
A
rivals match price decreases but ignore price increases
B
rivals never respond to any price changes
C
the firm faces perfectly elastic demand
D
rivals always match both price increases and decreases
Verified step by step guidance1
Understand the kinked demand curve model in oligopoly: it explains price rigidity when firms expect asymmetric reactions from rivals to price changes.
Recognize that the kinked demand curve arises because rivals are assumed to match price decreases to avoid losing market share, but ignore price increases to maintain higher prices.
This behavior causes the demand curve to be more elastic for price increases (since rivals do not follow, the firm loses customers) and less elastic for price decreases (since rivals match, the firm gains little market share).
Analyze each option by comparing it to the kinked demand curve assumptions: the correct condition is that rivals match price decreases but ignore price increases.
Conclude that this asymmetric response leads to the kink in the demand curve, explaining why firms in oligopoly may keep prices stable despite changes in costs.
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