If an increase in production costs (say, an increase in the wage rate) results in an upward shift in the MC curve, but the MC curve still passes through the MR gap created by the kinked demand curve, then the oligopolist will respond to that increase in production costs by
A) keeping price and output the same
B) raising price and decreasing output
C) lowering price and increasing output
D) raising price and raising output
E) lowering price and lowering output

Question

Quizplus · Accepted Answer

In the context of the kinked demand curve model for oligopolies, if the marginal cost (MC) curve shifts but still intersects the marginal revenue (MR) curve within the vertical gap (the MR gap) created by the kink in the demand curve, the firm will not change its price or output. This is because the firm's profit-maximizing condition—where MC equals MR—remains satisfied despite the shift in MC, as long as the new MC curve intersects the MR within the same gap.

If an Increase in Production Costs (Say, an Increase in the Wage