Multiple choice

Under kinked demand model, the demand curve for the firm's product is drawn on the assumption that

  1. All rivals charge the same price which is charged by the oligopolist.

  2. All rivals charge a price independent of the price charged by the oligopolist.

  3. All rivals follow the oligopolist up to certain price but beyond that they do not.

  4. All oligopolists charge the price as independent sellers.
Reveal answer Fill a bubble to check yourself
C Correct answer
Explanation

The kinked demand curve model assumes that if an oligopolist raises price, rivals will not follow (to gain market share), but if they lower price, rivals will match it (to prevent losing customers). This creates a 'kink' at the current price - rivals follow price cuts but not price increases, up to a certain point. Option C best captures this asymmetric behavior.

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