For a firm operating under the kinked demand model, the profit-maximizing quantity occurs at the point where:

• A. price equals marginal cost
• B. demand is perfectly elastic
• C. marginal cost intersects the vertical segment of the marginal revenue curve
• D. average total cost equals marginal cost

Answer: (C)

Verified step by step guidance

1. Understand the kinked demand model: it describes a firm's demand curve as having a 'kink' due to different elasticities above and below the current price, leading to a discontinuous marginal revenue (MR) curve with a vertical segment.
2. Recall that the firm's marginal revenue curve in this model has a vertical segment corresponding to the kink in the demand curve, where MR is not well-defined over a range of quantities.
3. Recognize that profit maximization occurs where marginal cost (MC) intersects the marginal revenue curve; in the kinked demand model, this intersection happens on the vertical segment of the MR curve.
4. Note that at this point, small changes in marginal cost do not change the profit-maximizing quantity because the vertical segment allows for a range of MC values to intersect MR without changing quantity.
5. Therefore, the profit-maximizing quantity is found where the MC curve intersects the vertical segment of the MR curve, not necessarily where price equals MC or where demand is perfectly elastic.