Firms 1 and 2 compete in a Cournot duopoly.If firm 2 adopts a strategy that, inadvertently, lowers firm 1's marginal cost:
A)Firm 1's reaction function will shift up.
B)Firm 2's reaction function will shift up.
C)Firm 2's reaction function will shift down.
D)Firm 1's reaction function will shift down.

Question

Quizplus · Accepted Answer

If firm 2's strategy lowers firm 1's marginal cost, then firm 1's profit-maximizing output level will increase. This means that firm 1's reaction function will shift up, as it will now produce more output for any given output level chosen by firm 2. Firm 2's reaction function will not be affected by this change, as it is determined solely by firm 2's own marginal cost and the market demand curve. Thus, options B, C, and D can be ruled out.

Firms 1 and 2 Compete in a Cournot Duopoly