Which of the following causes a kinked demand curve?

Question

The oligopolist believes that competitors will match price cuts, but not price increases.

The oligopolist believes that competitors will match price increases, but not output reductions.

The oligopolist believes that competitors will match output increases, but not output reductions.

The oligopolist believes that competitors will match both price increases and price decreases.

Answer 1

The correct statement that causes a kinked demand curve is:

The oligopolist believes that competitors will match price cuts, but not price increases.

This belief leads to a demand curve that is kinked at the current price because if an oligopolist lowers its price, competitors will likely follow, resulting in a relatively inelastic demand curve for that price reduction. Conversely, if the oligopolist raises its price, competitors are unlikely to follow, resulting in a more elastic demand curve for the price increase. This creates the characteristic "kink" in the demand curve faced by the oligopolist.