What are the marginal cost implications of the kinked demand curve?
Due to the kinked nature of the demand curve, an output range exists in the marginal revenue curve is vertical such that any change in marginal cost do not impact the profit-maximizing output level and consequently the price level.
What does a kinked demand curve show?
A kinked demand curve occurs when the demand curve is not a straight line but has a different elasticity for higher and lower prices. This model of oligopoly suggests that prices are rigid and that firms will face different effects for both increasing price or decreasing price.
Does marginal revenue have a discontinuity in a kinked demand curve?
Due to the kink in the demand curve of the oligopolist, his MR curve is discontinuous at the level of output corresponding to the kink.
What is the significance of the kink in Sweezy’s model?
A kinked demand curve represents the behavior pattern of oligopolistic organizations in which rival organizations lower down the prices to secure their market share, but restrict an increase in the prices.
Why is there a gap in the kinked demand curve?
Kinked-Demand Theory Consider a firm in an oligopoly that wants to change its price. Since the marginal revenue curve depends on prices, the marginal revenue curve is also kinked. At lower prices, the marginal revenue curve drops downward creating a gap.
Why does an oligopoly have a kinked demand curve and discontinuity in the marginal revenue curve?
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.
What is kinked demand curve How does it explain price rigidity?
The kinked demand curve model seeks to explain the reason of price rigidity under oligopolistic market situations. A kinked demand curve represents the behavior pattern of oligopolistic organizations in which rival organizations lower down the prices to secure their market share, but restrict an increase in the prices.
What happens to AC when MC is greater than AC?
Average product (AC) is the total cost per unit of output. When the MC is smaller the AC, the AC decreases. This is because when the extra unit of output is cheaper than the average cost then the AC is pulled down. Similarly, when the MC is greater than the AC, the AC is pulled up.