An oligopolist's effective demand curve will be kinked if the firm
A)is acting as a price leader in the industry.
B)expects other firms to match price cuts but not price increases.
C)expects other firms to match all price changes.
D)fears new entry into the industry.

Question

Quizplus · Accepted Answer

The kinked demand curve assumes that other firms will match price cuts, as they do not want to lose market share. However, they will not match price increases, as they do not want to appear more expensive than the other firms in the industry. This creates a "kink" in the demand curve at the current price, as a price increase would result in a large drop in quantity demanded, while a price decrease would not lead to a significant increase in quantity demanded.

An Oligopolist's Effective Demand Curve Will Be Kinked If the Firm