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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 gap (discontinuity) at the output corresponding to the kink. What is the implication if the marginal cost curve passes through this gap?

The firm keeps the same price and output even when marginal cost rises or falls within the vertical gap of the marginal revenue curve. Output stays at the kink because MR exceeds MC to the left and is below MC to the right.

  1. AThe firm will raise price to the level above the kink
  2. BThe firm's profit-maximising price and output stay unchanged even if marginal cost changes within the gapCorrect
  3. CThe firm will shut down since marginal revenue is undefined
  4. DThe firm will move to the perfectly competitive output level

Explanation

Profit is maximised where MC = MR. If MC cuts through the vertical gap, MR is above MC to the left and below MC to the right, so the optimum is at the kink output. Any shift in MC within the gap leaves price and output unchanged, which explains price rigidity. Raising price or shutting down is not implied.

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