Which of the following best describes the shape of the demand curve faced by an oligopolistic firm under the kinked demand curve model?

• A. It is a straight, downward-sloping line with constant elasticity.
• B. It has a kink at the current price, with a relatively elastic segment above and a relatively inelastic segment below the kink.
• C. It is perfectly inelastic at all prices.
• D. It is perfectly elastic at all prices.

Answer: (B)

Verified step by step guidance

1. Understand that the kinked demand curve model is used to describe the behavior of firms in an oligopoly, where each firm faces a demand curve that changes elasticity at a certain price point.
2. Recognize that the demand curve has a 'kink' at the current market price because firms expect different reactions from competitors depending on whether they raise or lower prices.
3. Above the kink (at prices higher than the current price), the demand curve is relatively elastic because if a firm raises its price, competitors are unlikely to follow, causing the firm to lose many customers.
4. Below the kink (at prices lower than the current price), the demand curve is relatively inelastic because if a firm lowers its price, competitors are expected to match the price cut, so the firm gains only a small increase in quantity demanded.
5. Therefore, the overall shape of the demand curve is not a smooth line but has a distinct kink at the current price, reflecting these different elasticities above and below that price.