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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 practical implication of this gap?

Within the vertical gap of the marginal revenue curve, marginal cost can shift up or down and still intersect MR at the same kink output. Hence the profit-maximising price and output remain unchanged, which explains price rigidity in oligopoly despite moderate cost changes.

  1. APrice must rise whenever the firm's costs rise
  2. BMarginal cost can change within the gap without changing the profit-maximising price and outputCorrect
  3. CFirm earns zero profit at the kink
  4. DFirm must produce where MR equals average cost

Explanation

The profit-maximising output is where MC equals MR, and MC passing anywhere through the vertical gap in MR still cuts it at the kink output. So price and output stay unchanged despite moderate cost changes. Saying price must rise with costs contradicts this rigidity.

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