The Kinked Demand Curve Model Is Based on the Assumption

question 106

Multiple Choice

The kinked demand curve model is based on the assumption that each firm:

• A) considers its rival's output to be fixed.
• B) considers its rival's price to be fixed.
• C) believes rivals will match all price changes.
• D) believes rivals will never match price changes.
• E) none of the above

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Definitions:

Long-Run Equilibrium

A state where all factors of production in an economy are fully adjusted to market conditions, leading to stable prices and full employment of resources.

Profit Maximization

The method a company uses to decide the price and production amount that yields the highest profit.

Economic Profits

The difference between a firm's total revenues and its total costs, including both explicit and implicit costs, representing the excess earnings over the next best alternative.

Monopolistic Competition

A trading structure inhabited by many corporations pushing products that are analogous but not carbon copies, which affords them a degree of control over the market.