A firm will have a "kinked" demand curve if its decision to raise prices is _____ matched by competitors, whereas its decision to lower prices is _____ matched by competitors.
A) always; always
B) always; rarely
C) rarely; always
D) rarely; rarely

Question

Quizplus · Accepted Answer

The "kinked" demand curve theory suggests that a firm faces a more elastic demand curve when it tries to increase prices (because competitors do not follow the price increase, leading to a loss of customers) and a more inelastic demand curve when it lowers prices (because competitors match the price decrease, resulting in minimal gain in customers). This scenario is described by option C, where the firm's decision to raise prices is rarely matched by competitors, and its decision to lower prices is always matched by competitors.

A Firm Will Have a "Kinked" Demand Curve If Its