Q314
The kinked demand curve model of oligopoly assumes that
A.
Response to a price increase is less than the response to a price decrease
AnswerB.
Response to a price increase is more than the response to a price decrease
C.
Elassticity of demand is constant regardless of whether price increases or decreases
D.
Elasticity of demand is perfectly elastic if price increases and perfectly inelastic if price decreases
Answer: Option A
Solution
Answer: Option A
Solution:
The kinked demand curve model of oligopoly assumes that response to a price increase is less than the response to a price decrease. In an oligopolistic market, the kinked demand curve hypothesis states that the firm faces a demand curve with a kink at the prevailing price level. The curve is more elastic above the kink and less elastic below it. This means that the response to a price increase is less than the response to a price decrease.