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The kinked demand curve hypothesis, proposed by Paul Sweezy, is mainly used to explain:
AFree entry under monopolistic competition
BPrice discrimination by a monopolist
CPrice rigidity in oligopolistic markets
DPerfectly elastic demand in competition
Answer & Solution
Correct answer: C. Price rigidity in oligopolistic markets
1. Oligopoly prices are often observed to stay sticky for long periods.
2. Sweezy's kinked demand curve assumes rivals follow price cuts but ignore price rises.
3. This makes the demand curve elastic above and inelastic below the current price.
4. So a firm gains nothing by changing price and keeps it rigid, explaining price stability.
_Source: ICAI BoS CA Foundation Paper 4 Business Economics, Ch 4 Unit III "Price-Output Determination under Different Market Forms", p.27_
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