Figure 13-3

-In Figure 13-3, demand curve CAD represents a market in which oligopolists will match the price changes of rivals and demand curve EAB represents a market in which oligopolists will ignore the price changes of rivals.According to the kinked demand model, the relevant demand curve will be
A)demand curve CAB.
B)demand curve CAD.
C)demand curve EAD.
D)demand curve EAB.

Question

Figure 13-3
​ 
-In Figure 13-3, demand curve CAD represents a market in which oligopolists will match the price changes of rivals and demand curve EAB represents a market in which oligopolists will ignore the price changes of rivals.According to the kinked demand model, the relevant demand curve will be
A)demand curve CAB. 
B)demand curve CAD. 
C)demand curve EAD. 
D)demand curve EAB.

Quizplus · Accepted Answer

The kinked demand curve model in oligopoly suggests that there is a higher elasticity for price increases (because rivals will not match price increases, leading to a loss of a significant number of customers) and lower elasticity for price decreases (because rivals will match price decreases, leading to a smaller gain in customers). Therefore, the relevant demand curve combines the more elastic portion of the demand curve above the kink (EAB, where oligopolists ignore price increases) with the less elastic portion below the kink (CAD, where oligopolists match price decreases), creating demand curve EAD.

Figure 13-3 ​

Figure 13-3