Answer to Question #257717 in Microeconomics for Kahil

Question

With the aid of a diagram explain on oligopolistic kinked demand curve.                                          (10 Marks)        

Answer 1

In an oligopolistic market, the kink demand curve hypothesis states that the firm faces a demand curve with a kink at the prevailing price level.

From the figure:

• Prevailing price level=P.
• Firm produces and sells output=OM.
• Upper segment (dP) of the demand curve (dD) is elastic.
• Lower segment (pD) of the demand curve (dD) is relatively inelastic.

This means that the response to an increase in price is less than the response to a decrease in price.

Each firm in an oligopolistic market believes that:

• If a firm lowers the price below the prevailing level, then competitors will follow the firm.
• If a firm raises the price above the prevailing level, then the competitors will not follow the firm.