What assumption(s) is (are) necessary to generate a kinked demand curve?
A) all firms in the industry ignore the price changes made by any one firm
B) any price decrease will be ignored but price increases will be followed
C) all firms will follow a price decrease but will ignore any price increase
D) all price changes made by any firm will be followed by all of the other firms
E) price can increase, but not decrease

Question

Quizplus · Accepted Answer

The kinked demand curve theory assumes that in an oligopoly, firms will follow a price decrease to avoid losing their market share but will ignore a price increase, assuming that if they increase their prices, they will lose customers to competitors who do not raise their prices. This creates a situation where prices tend to be rigid.

What Assumption(s) Is (Are) Necessary to Generate a Kinked Demand