Question

The kinked demand curve model of oligopoly assumes that:

• A. Response to a price increase is less than the response to a price decrease.
• B. Response to a price increase is more than the response to a price decrease.
• C. Elasticity 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 1

The correct option is A Response to a price increase is less than the response to a price decrease.

In an oligopoly market when the price of a commodity is decreased the competitors response by decreasing the price of their brand so as to exist in the market, whereas when the price increases there is no response by the competitors. So, kinked demand curve model of oligopoly assumes that response to a price increase is less than the response to a price decrease.