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'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 increases firm 1's marginal cost, it will cause firm 1's reaction function to shift downwards. This is because firm 1 will produce less output at any given price, as its cost of production has increased. The shift in firm 1's reaction function would result in a decrease in the equilibrium quantity and an increase in the equilibrium price. Therefore, the best choice is D.

Firms 1 and 2 Compete in a Cournot Duopoly