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A-Level Economics · Kinked demand (oligopoly) diagram question

MC₁ rises to MC₂ — the firm's costs go up. What happens to the price?

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The diagram

The answer

Nothing — both MC curves pass through the MR gap, so the profit-maximising output stays at Q* and the price stays at P*. Costs moved and the price did not. Within the gap there is no output at which MR and MC cross differently — so Q* and P* are unchanged. That is price rigidity. Notice there is deliberately no marked MC = MR point on this diagram. MC can sit anywhere inside the gap E to F and the profit-maximising output is still Q*, so the price is still P*. Costs rise, price sticks — the model's whole payoff, and the reason prices in oligopoly can be stable for years.

Test yourself properly

This is one of 6 questions on the kinked demand (oligopoly) diagram — every corner lettered, every wrong answer diagnosed.

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