The kinked demand curve model can be used to explain the sticky prices often see

Question

The kinked demand curve model can be used to explain the sticky prices often seen in markets characterized by oligopoly. A typical kinked demand curve consists of two straight lines joined at the kink (a piece-wise linear function). One such demand curve is represented by the equation P = 18 - Q if Q is less than or equal to 4, and P = 22 - 2Q if Q is greater than 4, where P is price (in dollars) and Q is quantity demanded. Which of the following kinked demand curves is described in the equation above ?

Explanation / Answer

The given kinked demand curve has two portions.

One portion is as follows -

P = 18 - Q, whe Q ia less than or equal to 4

This means that,

If Q = 0,

then, P = 18 - Q = 18 - 0 = 18

If Q = 1,

then, P = 18 - Q = 18 - 1 = 17

If Q = 2,

then, P = 18 - Q = 18 - 2 = 16

If Q = 3,

then, P = 18 - Q = 18 - 3 = 15

If Q = 4,

then, P = 18 - Q = 18 - 4 = 14

The other portion is as follows -

P = 22 - 2Q, where Q is greater than 4

If Q = 5,

then, P = 22 - 2Q = 22 - 2*5 = 22 - 10 = 12

If Q = 6

then, P = 22 - 2Q = 22 - 2*6 = 22 - 12 = 10

If we analyze all given demand curves then demand curve D fits in to the given demand equation because it shows that at price of $18, 0 units are demanded, at price of $17, 1 units is demanded and so on.

This is just equal to what given demand equation depicts and thus this demand curve fits the given demand equation.

Hence, the kinked demand curve D is describing the given equation.

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