CFA Practice Question

There are 539 practice questions for this study session.

CFA Practice Question

The industry demand curve in an oligopoly market ______
A. is more inelastic than the demand curve facing an individual oligopolistic firm.
B. is more elastic than the demand curve facing an individual oligopolistic firm.
C. has the same elasticity as the demand curve facing an individual oligopolistic firm.
Explanation: If an oligopolistic firm changes price alone, the response will be much stronger than the response to the same price change when all of the firm's rivals make the same move. The industry demand curve is relatively inelastic in comparison to the demand curve one firm faces when none of its rivals change price. That is how cheating on collusive agreements pays off (i.e., one firm gains by cutting price because the other firms have not cut price).

User Contributed Comments 3

User Comment
sbajaj Good question - interesting insight.
flpe1047 Can also be explained by the kinked demand model. Firm demand line below the kink is less elastic and equal to the market demand line. Upper region of the firm's kinked demand is more elastic because the market does not follow price increases.
psahni85 Think of it like this. If GM raised prices, I'll go for Toyota. If all of 'em raised prices, I have no choice - I still gotta buy a car.
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