Is a kinked demand curve elastic?
A kinked demand curve occurs when the demand curve is not a straight line but has a different elasticity for higher and lower prices. The kink in the demand curve occurs because rival firms will behave differently to price cuts and price increases.
Why is demand curve kinked in oligopoly?
The oligopolist faces a kinked‐demand curve because of competition from other oligopolists in the market. If the oligopolist increases its price above the equilibrium price P, it is assumed that the other oligopolists in the market will not follow with price increases of their own.
How do you find a kinked point?
To find the kink points, first notice that the y-intercept will be P = 0, the lowest intercept of the individual supply curves. The first kink point, is at P = 2, the next smallest intercept of the individual supply curves. The next kink point is at P = 3, the last intercept.
What is explain the kinked demand curve?
Answer: In an oligopolistic market, the kinked demand curve hypothesis states that the firm faces a demand curve with a kink at the prevailing price level. The curve is more elastic above the kink and less elastic below it. This means that the response to a price increase is less than the response to a price decrease.
What does kinked demand curve indicate?
What does kinked demand curve explain?
What is a kinked demand curve?
Is the demand curve above the prevailing price level inelastic?
The segment above the prevailing price level is highly elastic. The segment below the prevailing price level is inelastic. The following figure shows a kinked demand curve dD with a kink at point P.
How does the kinked demand curve explain the rigid or sticky prices?
This is how the kinked demand curve hypothesis explains the rigid or sticky prices. Q: The kinked demand curve model of oligopoly assumes that: response to a price increase is less than the response to a price decrease. response to a price increase is more than the response to a price decrease.
When is the elasticity of demand perfectly elastic?
the elasticity of demand is perfectly elastic if price increases and perfectly inelastic if the price decreases. Answer: In an oligopolistic market, the kinked demand curve hypothesis states that the firm faces a demand curve with a kink at the prevailing price level. The curve is more elastic above the kink and less elastic below it.
Why does an oligopolist face a less elastic demand curve?
The oligopolist will then face the relatively less elastic (or more inelastic) market demand curve MD 2. The oligopolist’s market demand curve becomes less elastic at prices below P because the other oligopolists in the market have also reduced their prices.