What phenomenon does the kinked demand theory attempt to explain? What assumptions does it make? Finally, what criticism has been leveled against the theory?
The kinked demand theory attempts to explain price rigidity in oligopoly. It assumes that rivals will follow
a firm's price reduction, but not a price increase. The criticism is that the theory does not explain how the
initial price and output are determined.
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In a market, competitive forces guarantee that any price other than the equilibrium price is:
a. market-clearing. b. stable c. temporary. d. unaffordable.
Changes in the equilibrium interest rate will:
A. affect both the size of the domestic output and the allocation of capital goods among industries. B. affect the size of the domestic output, but not the allocation of capital goods among industries. C. affect the allocation of capital goods among industries, but not the size of the domestic output. D. have no perceptible effect on either the size of the domestic output or the allocation of capital goods among industries.