Firm 1 and firm 2 compete as a Cournot oligopoly.There is an increase in marginal cost for firm 1.Which of the following is NOT true?
A) Firm 1 will produce less.
B) Firm 2 will produce more.
C) Both firm 1's and firm 2's reaction functions are shifted.
D) Profits of firm 1 will decrease.

Question

Quizplus · Accepted Answer

In a Cournot oligopoly, an increase in marginal cost for one firm affects its own output and profitability directly, and indirectly influences the output of the competing firm. However, only the reaction function of the firm experiencing the cost change (Firm 1) shifts, as it needs to adjust its output decision based on the new costs. Firm 2's reaction function does not shift; instead, Firm 2 may adjust its output in response to the change in Firm 1's output, not because its own reaction function has shifted.

Firm 1 and Firm 2 Compete as a Cournot Oligopoly