Question

Faceblock, Gargle+, and SnapHat are rival firms in an oligopoly industry. If kinked-demand theory applies to these three firms, what will be Faceblock's demand curve?

1) of equal elasticity both above and below the current price.
2) more elastic above the current price than below it.
3) less elastic above the current price than below it.
4) None of these are correct.

Answer 1

Faceblock's demand curve in an oligopoly industry applying the kinked-demand theory will be more elastic above the current price than below it, as competitors match price cuts but not price increases. Hence, option 2 is the correct response.

Step-by-step explanation:

In the context of an oligopoly, where firms like Faceblock, Gargle+, and SnapHat operate, the kinked-demand theory suggests a specific shape for Faceblock's demand curve due to competitive pressures. The kinked-demand curve implies that if Faceblock decides to lower its price, rival firms will quickly match price cuts, which means that a lower price will not significantly increase the quantity sold.

On the other hand, if Faceblock raises its price, competitors will not follow, causing a significant loss of sales for Faceblock. Therefore, Faceblock's demand curve would be highly elastic for price increases (a large change in quantity demanded for any price increase) and less elastic for price decreases (a smaller change in quantity demanded for any price decrease). According to the kinked-demand theory, Faceblock's demand curve will be more elastic above the current price than below it, meaning that option 2 is the correct answer.