The correct answer is: A. Response to a price increase is less than the response to a price decrease.
The kinked demand curve model of oligopoly is a model that explains how firms in an oligopolistic market set prices. The model assumes that firms have a kink in their demand curve, which means that they are more likely to respond to a price decrease than to a price increase. This is because firms in an oligopolistic market are afraid of retaliation from their competitors. If one firm lowers its price, other firms may follow suit, which could lead to a price war. However, if one firm raises its price, other firms are unlikely to follow suit, as they would lose market share.
The kinked demand curve model is a useful tool for understanding how firms in an oligopolistic market set prices. However, it is important to note that the model is a simplification of reality. In reality, firms in an oligopolistic market may not always behave in the way that the model predicts.
Here is a brief explanation of each option:
- Option A: Response to a price increase is less than the response to a price decrease. This is the assumption that is made by the kinked demand curve model.
- Option B: Response to a price increase is more than the response to a price decrease. This is not the assumption that is made by the kinked demand curve model.
- Option C: Elasticity of demand is constant regardless of whether price increases or decreases. This is not the assumption that is made by the kinked demand curve model. The kinked demand curve model assumes that the elasticity of demand is different for price increases and price decreases.
- Option D: Elasticity of demand is perfectly elastic if price increases and perfectly inelastic if price decreases. This is not the assumption that is made by the kinked demand curve model. The kinked demand curve model assumes that the elasticity of demand is different for price increases and price decreases, but it does not assume that the elasticity of demand is perfectly elastic or perfectly inelastic.