CFA Practice Question

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CFA Practice Question

In the kinked demand curve model, ______ is (are) likely to change when there is a small change in cost.

A. quantity only
B. price only
C. neither price nor quantity
Correct Answer: C

User Contributed Comments 9

User Comment
Khadria Kinked Demand Curve tells about the behavior when change in "price" is there. It tells nothing about the "COST". Hence change in cost has no affect on price and quantity.
ScottMW Yes it does. It shows that if cost (as represented by the MC curve) shifts up but stays within the MR "disconnect", it will not effect equilibrium price and quantity.
rabt2 very tricky question...the answer is indeed correct
bidisha think of car manufactureres
gill15 Got confused for a second. We're thinking of the vertical portion of the MR curve. When MC increases or decreases the equilibrium P and Q remain the same. Good Question.
fzhou Agree with ScottMW! Since MR curve is discontinuous at the kink point of Demand curve, there's no price/quantity value within the discontinuous domain. Therefore even though MC curve moves in the discontinuous area, it will not affect price or quantity.
Tashen111 Please explain someone :-( ... I thought that an increase in Costs (an upward shift in the marginal cost curve) would cause the price to increase without changing the demand (i.e. an upward movement along the vertical portion of the MR curve) as the new price and quantity are determined by the point where MR=MC... Am i missing something? Or am i overthinking this one?
chesschh Look at the graph in the reading. When MC0 moves to MC1, price and quantity remain the same. This shows a "small change"
choas69 watch the kinked demand curve
by ross mcglothlin
in utube he is good.
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