CA Foundation · Business Economics · Price Determination in Different Markets
In the kinked demand curve model, the marginal revenue curve has a vertical discontinuity (gap) at the output corresponding to the kink. What is the managerial implication of this gap?
Within the vertical gap in the marginal revenue curve, marginal cost can change without altering the equilibrium output or price, since MC still cuts MR at the kink. This explains price rigidity in oligopoly under the kinked demand model.
- APrice must rise whenever demand rises
- BOutput must be fixed by the government
- CSmall changes in marginal cost within the gap leave the profit-maximising price and output unchangedCorrect
- DFirms will always collude to fix price
Explanation
Because MR is discontinuous at the kink, the MC curve can shift up or down within the gap and still cut MR at the same output. Hence the price and output stay the same. This is why prices are rigid. Collusion is not part of this model.
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