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CA Foundation · Business Economics · Price Determination in Different Markets

Under the kinked demand curve model of oligopoly, prices tend to remain rigid because rivals are assumed to:

Prices stay rigid because rivals ignore a firm's price increase but match its price cut. A rise loses many customers, while a cut gains little, so the firm has no incentive to change price. The discontinuity in marginal revenue keeps price stable despite moderate cost changes.

  1. AMatch both price increases and price cuts by a firm
  2. BIgnore both price increases and price cuts by a firm
  3. CIgnore a price increase but match a price cutCorrect
  4. DMatch a price increase but ignore a price cut

Explanation

If a firm raises price and rivals do not follow, it loses many customers, so demand above the kink is elastic. If it cuts price and rivals match, it gains little, so demand below the kink is inelastic. This makes the marginal revenue curve discontinuous, so cost changes within the gap leave price unchanged. Option D reverses the logic.

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