Question

The kinked demand curve theory of oligopoly assumes that rival firms: A)   react to price increase. B)   react...

The kinked demand curve theory of oligopoly assumes that rival firms:

A)   react to price increase.

B)   react to output increase.

C)   react to price decrease.

D)   react to output decrease.

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Homework Answers

Answer #1

In the kink demand model, above the kink, if firm increases price, then no firm will follow due to elastic demand but when firm decreases price below kink point, then other firm will follow it because demand is inelastic.

Hence it can be asserted that in the kinked-demand model is based on the notion that an oligopoly firm assumes rival firms will ignore price increases but match price decreases.

Hence it can be said that the kinked demand curve theory of oligopoly assumes that rival firms react to price decrease.

Hence option third is the correct answer.

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