Asked by Derise Major on Jul 03, 2024
Verified
The key disadvantage of the kinked-demand model is that it:
A) explains why firms may collude, but it does not explain how they interact.
B) does not explain why prices may be rigid in an oligopoly.
C) requires the assumptions of perfect competition.
D) only holds under price leadership.
Kinked-Demand Model
A model in oligopoly markets, suggesting that firms might face a demand curve that has a sharp bend or "kink" at the current price, leading to sticky prices.
Price Rigidity
The situation in which prices do not change quickly in response to changes in demand or supply, remaining static despite market pressures.
- Evaluate the hypotheses and ramifications inherent in the kinked demand curve framework.
Verified Answer
ZK
Zybrea KnightJul 07, 2024
Final Answer :
B
Explanation :
The kinked-demand model assumes that prices are rigid in an oligopoly, but it does not provide an explanation for why this may be the case. This is considered a disadvantage because it limits the model's applicability to real-world situations.
Learning Objectives
- Evaluate the hypotheses and ramifications inherent in the kinked demand curve framework.
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