Skip to main content
Back

Kinked-Demand Theory quiz

Control buttons has been changed to "navigation" mode.
1/15
  • What is the main reason oligopolies exhibit a kinked demand curve?
    Oligopolies have a kinked demand curve because rival firms react differently to price increases and decreases, matching price cuts but ignoring price hikes.
  • How do competitors typically react if a firm in an oligopoly decreases its price?
    Competitors usually match the price decrease to avoid losing market share.
  • What happens if a firm in an oligopoly increases its price and competitors ignore the change?
    The firm loses customers to rivals who keep their prices lower, resulting in a significant drop in quantity sold.
  • Why is the demand curve for an oligopoly difficult to predict?
    It's difficult because firms' pricing decisions are interdependent and depend on unpredictable rival reactions.
  • What shape does the kinked demand curve take, and why?
    It has a 'kink' at the current price because the slope changes at that point due to different competitor reactions to price increases and decreases.
  • How does the kinked demand curve affect price stability in oligopolies?
    It leads to price inflexibility, making prices stable even if marginal costs change within a certain range.
  • What is the effect on quantity sold if a firm lowers its price and competitors match the decrease?
    There is only a slight increase in quantity sold, as no firm gains a significant advantage.
  • What is the effect on quantity sold if a firm raises its price and competitors do not match the increase?
    The firm experiences a large decrease in quantity sold as customers switch to competitors.
  • How does the marginal revenue curve appear under the kinked demand theory?
    The marginal revenue curve has a discontinuity (a gap) at the kink, reflecting the two different slopes of the demand curve.
  • What happens to production if marginal cost shifts within the discontinuity of the marginal revenue curve?
    Production and price remain unchanged as long as marginal cost stays within the discontinuity.
  • How does the kinked demand theory explain price inflexibility in oligopolies?
    It shows that firms have little incentive to change prices because either action (increase or decrease) leads to unfavorable outcomes.
  • How does game theory relate to the kinked demand theory?
    Game theory helps explain how firms anticipate and react to rivals' pricing decisions, leading to the kinked demand curve.
  • How does the number of firms in an oligopoly affect the demand curve?
    The number of firms influences the shape and steepness of the demand curve due to varying competitive pressures.
  • How does the kinked demand theory differ from perfect competition or monopoly in terms of price changes?
    Unlike perfect competition or monopoly, price and output in oligopolies remain stable despite changes in marginal cost, due to the kinked demand curve.
  • What is the main takeaway students should remember about the kinked demand theory?
    The main takeaway is that the kinked demand curve explains why prices in oligopolies are generally stable and inflexible due to competitors' reactions.