Question

The model of the kinked demand curve in price competition implies that:

a. free entry in the market will eventually reduce economic profits to zero.
b. firms will coordinate prices so as to maximize group profit.
c. strong brand loyalty by consumers gives firms little incentive to reduce prices.
d. a firm's competitors will match any price cuts by the firm but not price hikes.
e. firms in the market match the market price set by a single dominant firm.

Answer 1

Answer:

b.

Explanation:

firms will coordinate prices so as to maximize group profit.

Due to the discontinuous gap , the kinked demand theory predicts that price and quantity will be insensitive to small changes in the cost of production. As a result, prices can be fairly rigid and stable in an oligopoly even when firms are acting independently without any collusive activities