Assume that an oligopolist has a kinked demand curve. Suppose that the marginal cost curve passes through the gap in the marginal revenue curve. This means price and output will be shown by a point:

Question

Quizplus · Accepted Answer

The kink in the demand curve represents a price level at which the firm's competitors are likely to follow suit, leading to a relatively inelastic demand curve above the kink and a relatively elastic demand curve below the kink. The point at which the marginal cost curve passes through the gap in the marginal revenue curve represents the firm's optimal output level, as it equates marginal cost and marginal revenue. This point will be located at the kink in the demand curve, as this is the point at which the firm's marginal revenue changes from one slope to another. Therefore, the correct answer is C, at the kink.

Assume That an Oligopolist Has a Kinked Demand Curve