Firms 1 and 2 compete in a Cournot duopoly.If firm 2 adopts a strategy that raises firm 1's marginal cost:
A) firm 1 will reduce its output.
B) firm 2 will lose market share.
C) firm 2 will enjoy lower profits.
D) None of the preceding statements is correct.

Question

Quizplus · Accepted Answer

If firm 2 raises firm 1's marginal cost, then firm 1's profit-maximizing output level will decrease, as it will become more expensive for firm 1 to produce each unit. This is because the marginal revenue curve will shift downwards, resulting in lower profits for firm 1. Therefore, firm 1 will reduce its output.

Firms 1 and 2 Compete in a Cournot Duopoly