WBCS.LIVE practice question

The kinked demand curve model is an economic theory primarily used to explain price rigidity in which market structure?

Solve this multiple-choice question and check the correct answer with its explanation below.

Answer options

  1. Perfect competition
  2. Oligopoly
  3. Monopoly
  4. Monopolistic competition

Correct answer and explanation

Correct answer: Oligopoly

Explanation: āœ… Correct Answer: B) Oligopoly šŸ“š Explanation: The kinked demand curve model is a prominent microeconomic theory used to explain price rigidity in an oligopolistic market structure. It assumes that if a firm raises its price, competitors will not follow, leading to a sharp drop in sales; however, if a firm lowers its price, competitors will closely match it. This creates a "kink" in the demand curve at the current price point, making firms extremely hesitant to change prices.