Refer to Figure 25.1 for an oligopoly firm.Assume that the existing price and quantity are $10 and 2,000 units.Which of the following statements is most likely correct? A) Demand curves D₁ and D₂ both assume that rivals will not match any price changes. B) Demand curves D₁ and D₂ both assume that rivals match any price changes. C) Demand curve D₁ assumes that rivals match any price changes. D) Demand curve D₂ assumes that rivals match any price changes.

Question

Quizplus · Accepted Answer

Demand curve D₁ assumes that rivals match any price changes. This is because the demand curve is relatively elastic, which means that if the firm raises its price, its rivals will lower their prices in response, causing the firm to lose a large share of its customer base. Therefore, the firm cannot increase its price without losing market share, and rivals will match any price changes it makes.