If an oligopolistic manufacturer believes that he faces a kinked demand curve for his product, he thinks his competitors will ______ if he lowers his price and ____ if he raises his price.
A)lower their prices; raise their prices
B)lower their prices; not raise their prices
C)not lower their prices; raise their prices
D)not lower their prices; not raise their prices

Question

Quizplus · Accepted Answer

The kinked demand curve assumes that the demand for the oligopolistic manufacturer's product is relatively elastic if they raise their price above the current market price, and relatively inelastic if they lower their price below the current market price. Therefore, if the manufacturer lowers their price, they can expect their competitors to follow suit to prevent a loss of market share. However, if they raise their price, their competitors are less likely to follow suit and instead may keep their prices the same, leading to a loss of market share for the manufacturer. Choice B is the best option as it reflects this behavior.

If an Oligopolistic Manufacturer Believes That He Faces a Kinked