Question 1

Which of the following best describes the kinked-demand curve theory for oligopolies?

Accepted Answer

It suggests that firms face a demand curve with a 'kink' due to different rival reactions to price increases and decreases.

Question 2

In the kinked-demand curve model, what typically happens if a firm raises its price?

Accepted Answer

Rival firms will not match the price increase, causing the firm to lose sales to competitors.

Question 3

Why is the marginal revenue ($MR$) curve discontinuous in the kinked-demand curve theory?

Accepted Answer

Because the demand curve has a 'kink' where rival reactions to price changes differ, creating a gap in $MR$.

Question 4

Suppose Burger Queen and Windy's are in an oligopoly market for black bean burgers. If Burger Queen lowers its price, what is the most likely reaction from Windy's according to the kinked-demand curve theory?

Accepted Answer

Windy's will match the price cut to avoid losing market share.

Question 5

Which of the following is a key reason why demand curves for oligopolies are not the same across all industries?

Accepted Answer

The number of firms and the degree of interdependence among them vary.

Question 6

If the marginal cost ($MC$) shifts within the discontinuous segment of the marginal revenue ($MR$) curve in a kinked-demand oligopoly, what is the likely effect on price and output?

Accepted Answer

Price and output will remain stable.

Question 7

Which equation represents the profit-maximizing condition for a firm in an oligopoly, including those with a kinked-demand curve?

Accepted Answer

$MR = MC$

Question 8

A firm in an oligopoly is considering a price cut. According to the kinked-demand curve theory, what is the most likely outcome?

Accepted Answer

Rivals will match the price cut, and the firm will gain little advantage.

Question 9

Which of the following best explains why prices in oligopolistic markets tend to be stable?

Accepted Answer

Because the kinked-demand curve creates a range where changes in marginal cost do not affect price.

Question 10

If a firm in an oligopoly faces a kinked-demand curve, what does the 'kink' represent?

Accepted Answer

A point where rival firms' reactions to price changes differ.

Question 11

Consider an oligopoly where the demand curve is kinked at price $P^*$. If marginal cost increases but remains within the discontinuous segment of the $MR$ curve, what should the firm do?

Accepted Answer

Keep price and output unchanged.

Question 12

Which of the following is NOT a characteristic of oligopolistic markets as described by the kinked-demand curve theory?

Accepted Answer

Firms can easily predict rivals' reactions with certainty.

Question 13

Suppose the marginal cost ($MC$) for a firm in an oligopoly increases and crosses the discontinuity in the marginal revenue ($MR$) curve. What is the likely effect?

Accepted Answer

The firm will have to change its price and output.

Question 14

Which of the following real-world scenarios best illustrates the kinked-demand curve theory?

Accepted Answer

Major fast-food chains like Burger Queen and Windy's responding to each other's price changes for similar products.

Question 15

In the context of oligopoly, what does 'interdependence' mean?

Accepted Answer

Firms' decisions affect and are affected by the actions of other firms.

Question 16

If the demand curve for an oligopoly is kinked at quantity $Q^*$ and price $P^*$, and the marginal cost curve shifts but does not cross the discontinuity in $MR$, what is the profit-maximizing output?

Accepted Answer

$Q^*$

Question 17

Which of the following statements about the kinked-demand curve is FALSE?

Accepted Answer

It predicts that marginal revenue is continuous at all output levels.

Question 18

A firm in an oligopoly is considering a price increase. According to the kinked-demand curve theory, what is the most likely outcome?

Accepted Answer

Rivals will not match the price increase, and the firm will lose sales.

Question 19

Which of the following best describes the effect of a 'kink' in the demand curve on a firm's pricing strategy?

Accepted Answer

It leads to price rigidity, as firms have little incentive to change prices.

Kinked-Demand Theory and Oligopoly Pricing

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