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:
A) above the curve.
B) below the curve.
C) at the kink.
D) on the upper part of the curve.

Question

Quizplus · Accepted Answer

The kinked demand curve suggests that the market is oligopolistic, where firms are interdependent and take into account the reactions of their rivals when determining their own price and output decisions. The kink in the demand curve represents a point where the demand for the firm's product becomes relatively elastic above the kink and relatively inelastic below the kink. This means that a small change in price above the kink will cause a large change in the quantity demanded, while a similar change in price below the kink will only have a small impact on the quantity demanded. Therefore, if the marginal cost curve passes through the gap in the marginal revenue curve at the kink, the optimal price and output level will be at that point, which is shown by the kink in the demand curve. As a result, the answer is C, at the kink.

Assume That an Oligopolist Has a Kinked Demand Curve