Kinked demand curve hypothesis is designed to explain in context of oligopoly
Options
APrice stickiness
BPrice discrimination
CPrice output determination
DCollusion
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Price Determination in Different MarketsPYQ - Nov 2019Question 64 of 20
All Questions Correct Answer
✅ Option a — Price stickiness
All Options:
- APrice stickiness
- BPrice discrimination
- CPrice output determination
- DCollusion
Detailed Solution & Explanation
To understand the kinked demand curve hypothesis, let's break it down:
• The kinked demand curve is a model used to explain the behavior of firms in an oligopoly market structure.
• In an oligopoly, a few firms compete with each other, and each firm has some degree of price-setting power.
• The kinked demand curve hypothesis suggests that if a firm raises its price, its competitors will not follow, and it will lose market share.
• On the other hand, if a firm lowers its price, its competitors will match the price cut to maintain their market share.
• This leads to a situation where firms are reluctant to change their prices, resulting in price stickiness.
The correct answer is related to price stickiness because the kinked demand curve hypothesis explains why firms in an oligopoly may keep their prices stable, even in the face of changes in costs or demand.
Some options are incorrect because price discrimination refers to charging different prices for the same product in different markets, and collusion refers to an agreement among firms to fix prices or restrict output, which is not directly related to the kinked demand curve hypothesis.
About This Chapter: Price Determination
Paper
Paper 4: Business Economics
Weightage
15%
Key Topics
Perfect Competition, Monopoly, Monopolistic, Oligopoly
This high-weightage chapter covers all four market structures: Perfect Competition, Monopoly, Monopolistic Competition, and Oligopoly. Students learn how price and output are determined under each structure, along with key concepts like Price Discrimination, Kinked Demand Curve, and the conditions of equilibrium (MR = MC).
View Official ICAI SyllabusExam Strategy Tip
This chapter carries the highest weightage (~15%). Focus on features of each market, the shape of AR and MR curves, and understand why firms in Perfect Competition are 'Price Takers' while Monopolists are 'Price Makers'.
Key Concepts to Understand
Related Comparison Tables
More Questions from Price Determination in Different Markets
Under which of the following forms of market structure does a firm have no control over the price of its product?
A firm encounters its "shutdown point" when:
Which of the following is not a characteristic of a "Price Taker"?
Price discrimination will be profitable only if the elasticity of demand in different markets is:
Which of the following is not an essential condition of pure competition?
In the long run, a firm in a perfectly competitive market earns:
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