A major weakness of the kinked demand curve model of oligopoly is that ?
Correct answer: B. it fails to explain how a firm arrived at its price and output decision initially
- A. it assumes that firms believe that their rivals will not respond to any price change they initiate
- B. it fails to explain how a firm arrived at its price and output decision initially
- C. The model cannot be tested empirically.
- D. Real-world pricing strategies are more simple than those assumed in this model
Explanation
The kinked-demand model explains why prices may remain rigid after a firm has set its price, but it does not explain how the original price and output were determined. That missing price-setting explanation is its standard major weakness.
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Individual consumers, firms and markets are examined through demand and supply, elasticity, consumer choice, production, costs, revenue and the determination of prices and output. The topic also covers market structures such as perfect competition, monopoly and oligopoly, plus market failure, externalities and the distinction between microeconomic decisions and economy-wide outcomes.
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