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 increase its output.
B) firm 2 will lose market share.
C) firm 1 will enjoy higher profits.
D) None of the preceding statements is correct.

Question

Quizplus · Accepted Answer

In a Cournot duopoly, if firm 2 adopts a strategy that raises firm 1's marginal cost, firm 1 will likely reduce its output to equate marginal cost with marginal revenue, not increase it. This reduction in output could potentially allow firm 2 to gain, not lose, market share. Additionally, higher marginal costs for firm 1 would typically lead to lower, not higher, profits for firm 1. Therefore, none of the provided statements is correct.

Firms 1 and 2 Compete in a Cournot Duopoly