The correct answer is: A. In response to a price increase is more than the elasticity of demand in response to price decrease.
The kinked demand curve model of oligopoly assumes that the demand curve for a firm’s product is kinked at the current price. This means that if the firm raises its price, its demand will decrease sharply, as consumers will switch to the products of other firms. However, if the firm lowers its price, its demand will not increase very much, as consumers will be reluctant to switch to the firm’s product.
This is because firms in an oligopoly are interdependent. If one firm raises its price, the other firms are likely to follow suit, in order to avoid losing customers. However, if one firm lowers its price, the other firms are unlikely to follow suit, as they will be afraid of losing profits.
The kinked demand curve model can explain why oligopolistic firms often charge prices that are higher than the competitive price. This is because the firms are aware that if they lower their prices, the other firms are unlikely to follow suit, and they will lose a lot of customers.
The kinked demand curve model has been criticized for being too simplistic. It assumes that firms are not able to collude, and that they are always willing to compete on price. However, in reality, firms in an oligopoly often collude, and they may not always be willing to compete on price.
Despite its limitations, the kinked demand curve model is a useful tool for understanding oligopolistic markets. It can help to explain why oligopolistic firms often charge prices that are higher than the competitive price, and why they are often reluctant to compete on price.
Here is a brief explanation of each option:
- Option A: In response to a price increase is more than the elasticity of demand in response to price decrease. This is the correct answer, as explained above.
- Option B: Is constant regardless of whether price increase or decrease. This is not correct, as the demand curve is kinked, and the elasticity of demand is not constant.
- Option C: Is infinite, if price increase and zero, if price decreases. This is not correct, as the elasticity of demand is not infinite or zero.
- Option D: In response to a price increase is less than the elasticity of demand in response to price decrease. This is not correct, as explained above.