Answer to Question #49108 in Microeconomics for Jennifer

Question

The kinked-demand curve model of oligopoly:
A. assumes a firm's rivals will ignore a price cut but match a price increase.
B. assumes a firm's rivals will ignore any price change it may initiate.
C. embodies the possibility that changes in unit costs will have no effect on equilibrium price and output.
D. assumes a firm's rivals will match any price change it may initiate.

Answer 1

The kinked demand curve theory is an economic theory regarding oligopoly and monopolistic competition. When it was created, the idea fundamentally challenged classical economic tenets such as efficient markets and rapidly changing prices, ideas that underlie basic supply and demand models. Kinked demand was an initial attempt to explain sticky prices. "Kinked" demand curves and traditional demand curves are similar in that they are both downward-sloping. They are distinguished by a hypothesized concave bend with a discontinuity at the bend - the "kink." Therefore, the first derivative at that point is undefined and leads to a jump discontinuity in the marginal revenue curve. So, the kinked-demand curve model of oligopoly embodies the possibility that changes in unit costs will have no effect on equilibrium price and output. The right answer is C.