Question

The Kinked demand curve model can explain 

(A) The level at which price will be set by firms to maximize profits. 
(B) The level of price at which the kink will occur as well as the height of the kink. 
(C) The price rigidity in the face of changing costs and of high rivalry. 
(D) The implications for the volume of output owing to changing market demand. 
Choose the correct answer from the options given below:
 

• A. (A) and (B) only
• B. (A), (B), and (C) only
• C. (A), (B), (C), and (D)
• D. (B) and (D) only

Hint:

In an oligopoly, firms tend to keep prices stable to avoid price wars. The kinked demand curve model explains why prices are sticky in such markets.

Answer 1

The Correct Option is B

Step 1: Understand the Kinked Demand Curve Model.
The kinked demand curve model is used to explain price rigidity in an oligopolistic market, where firms are reluctant to change prices due to the fear of losing customers or triggering price wars. The model assumes that firms will follow price cuts but not price increases, leading to a kink in the demand curve at the market price.

Step 2: Analysis of options.
- (A) The level at which price will be set by firms to maximize profits: This is correct. The kinked demand curve model explains how firms choose a price point where their demand curve is kinked, leading to profit maximization.
- (B) The level of price at which the kink will occur as well as the height of the kink: This is correct. The kink represents the point at which firms have a stable price but are unwilling to increase prices. The model also considers the height of the kink, which reflects the market's response to price changes.
- (C) The price rigidity in the face of changing costs and of high rivalry: This is correct. The kinked demand curve model explains price rigidity, where firms are hesitant to change prices because of competition. The market reacts differently to price increases and decreases, making price changes risky.
- (D) The implications for the volume of output owing to changing market demand: This is incorrect. The kinked demand curve model does not focus on output changes in response to demand; instead, it focuses on price rigidity due to oligopolistic competition.

Step 3: Conclusion.
The correct answer is (A), (B), and (C) only, as they align with the key aspects of the kinked demand curve model.