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Chapter 23: Problem 26

According to the theory of the kinked demand curve, if a firm were to lower its price, its competitors would (LO3) a) lower theirs b) raise theirs c) keep theirs the same

Short Answer

Expert verified
a) lower theirs

Step by step solution

01

Defining the kinked demand curve theory

The kinked demand curve theory is a model in oligopoly markets, which predicts that a firm will face two different demand curves: one for when it raises its price, and another for when it lowers its price. The key idea behind this theory is that firms within an oligopoly market will react differently to a competitor's price changes.
02

Firms’ reactions to a price increase or decrease

According to the kinked demand curve theory, if a firm increases its price, its competitors will keep their prices constant, thinking they can gain some market share. However, if a firm lowers its price, its competitors will follow by lowering their prices as well, fearing that they will lose market share to the firm that lowered its price initially.
03

Choose the correct response from the given options

Given the kinked demand curve theory, when a firm lowers its price, its competitors would: a) lower theirs.

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Most popular questions from this chapter

Which statement about oligopolies is false? (LO3) a) They operate at the minimum points of their ATC curves. b) They charge higher prices than perfect competitors. c) They make profits in the long run. d) They cannot legally form cartels in the United States.

Compared to the perfect competitor in the long run, the cutthroat oligopolist has a ( \(\mathrm{LO3})\) a) lower price and lower profits b) higher price and higher profits c) higher price and lower profits d) lower price and higher profits

Which of the following is not an oligopolist? (LO4 a) ExxonMobil b) General Motors c) Your local phone company d) Xerox

According to the theory of the kinked demand curve, if a firm were to raise its price, its competitors would (LO3) a) lower theirs b) raise theirs c) keep theirs the same

A monopoly would have a concentration ratio of and a Herfindahl-Hirschman index of (LO1) a) 100,100 c) \(10,000,100\) b) \(10,000,10,000\) d) \(100,10,000\)
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