Discussion
A point of 'Kink' in the kinked demand curve indicates
I. Price rigidity
II. Quantity rigidity
III. Price flexibility
IV. Quantity flexibility
Answer: A
The kink in the kinked demand curve indicates price rigidity and quantity rigidity, statements I and II, option A. A rival is assumed to match a price cut but not a price rise, so the demand curve is elastic above the kink and inelastic below it. The marginal revenue curve has a gap at the output of the kink, so changes in marginal cost within the gap do not alter the price or the output, which stay fixed. Statements III and IV, price flexibility and quantity flexibility, say the opposite, so options B, C and D, which include them, are wrong.
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