In pursing its own interest, an oligopoly firm will decide to increase production by 1 unit as long as
A)there is no output effect.
B)there is no price effect.
C)the output effect is larger than the price effect.
D)the price effect is larger than the output effect.

Question

Quizplus · Accepted Answer

In oligopoly, any increase in production by a single firm will have two effects: output effect and price effect. The output effect will increase the total production which will lead to a decrease in price, while the price effect will increase the unit price, leading to an increase in total revenue. For an oligopoly firm to increase production by 1 unit, they will need to compare the output effect (which causes a decrease in price) to the price effect (which increases total revenue). If the output effect is larger than the price effect, the firm will increase production by 1 unit because the decrease in price will be outweighed by the increase in total revenue. Therefore, the correct answer is C.

In Pursing Its Own Interest, an Oligopoly Firm Will Decide