Price and output determination
Price rigidity
Price leadership
Collusion among rivals
Answer is Right!
Answer is Wrong!
The correct answer is: B. Price rigidity
The kinked demand curve hypothesis is a theory that explains why prices tend to be rigid in oligopolistic markets. The theory states that the demand curve for an oligopolistic firm is kinked at the current price, with a relatively elastic demand curve below the kink and a relatively inelastic demand curve above the kink. This means that a firm will face a significant decrease in demand if it raises its price, but only a small increase in demand if it lowers its price. As a result, firms in oligopolistic markets are reluctant to change their prices, and prices tend to be rigid.
Here is a brief explanation of each option:
- A. Price and output determination. This is a broad topic that encompasses a variety of theories, including the kinked demand curve hypothesis. However, the kinked demand curve hypothesis is not specifically designed to explain price and output determination.
- C. Price leadership. Price leadership is a phenomenon in which one firm in an oligopolistic market sets the price for the other firms in the market. The kinked demand curve hypothesis does not explain price leadership.
- D. Collusion among rivals. Collusion is an agreement between firms to fix prices or otherwise restrict competition. The kinked demand curve hypothesis does not explain collusion.