2. Facepalm, Instarant, and Snaphat are rival firms in an oligopoly industry. If kinked-demand theory applies to these three firms, Facepalm’s demand curve will be:
a. more elastic above the current price than below it.
b. less elastic above the current price than below it.
c. of equal elasticity both above and below the current price.
d. none of the above.

Question

2. Facepalm, Instarant, and Snaphat are rival firms in an oligopoly industry. If kinked-demand theory applies to these three firms, Facepalm’s demand curve will be: 
a.     more elastic above the current price than below it.
b.     less elastic above the current price than below it.
c.     of equal elasticity both above and below the current price.
d.     none of the above.

BlackTom AI · Accepted Answer

Let's dissect the question by recalling the core idea of kinked-demand theory in an oligopoly.
Option a: 'more elastic above the current price than below it.' This aligns with the standard kinked-demand assumption: if a firm raises its price, rivals typically do not follow, so customers switch to other firms, making the demand more price-elastic above the current price. Conversely, if the firm lowers its price, rivals match the reduction, reducing the gain from cutting price and making the demand less elastic below the current price. This is the hallmark of the kink.
Option b: 'less elastic above the current price than below it.' This would imply price increases deter fewer customers than price decreases attract, which is contrary to the kinked-demand logic where price hikes face competitive resistance and greater elasticity.
Option c: 'of equal elasticity both above and below the current price.' The kinked-demand model specifically produces an asymmetric elasticity: different responses to price changes above versus below the current price, not equal elasticity.
Option d: 'none of the above.' Since option a correctly captures the kinked-demand idea, this choice would be inaccurate.
To summarize, the kinked-demand framework posits a relatively elastic demand for price increases (above the current price) and a relatively inelastic demand for price cuts (below the current price), making option a the one that fits the theory. The other options contradict this established pattern of elasticity in the kinked-demand context.

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