Question

If an oligopolistic manufacturer believes that he faces a kinked demand curve for his product, he thinks his competitors will ______ if he lowers his price and ____ if he raises his price.
(A) lower their prices; not raise their prices
(B) lower their prices; raise their prices
(C) not lower their prices; not raise their prices
(D) not lower their prices; raise their prices

Answer 1

Answer:

(A) lower their prices; not raise their prices

Explanation:

• The oligopolistic market and the kinked demand curve show the relationship with the existing prices as the firm rise their prices above the current price the competitors will not follow as they have to maintain strict competition and thus the film will lose the market.

• But if a firm tends to lower the prices the other will follow and they will retain the market shares and the format output will increase marginally.

• Works on the assumptions that prices on the curve are relatively elastic