Question

In an oligopoly with a kinked demand curve, why do prices tend to remain rigid around the kink?

Options

• Because AR is horizontal at all output levels

• Because MR is always equal to AR

• Because the MR curve has a discontinuous gap around the kink

• Because TR increases at a constant rate

Answer 1

Because the MR curve has a discontinuous gap around the kink

Explanation: 

The MR curve has a vertical gap near the kink, so small cost changes do not change the profit-maximising output and price, making price sticky.