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 gain market share.
C) firm 2 will enjoy higher profits.
D) All of the statements associated with this question are correct.

Question

Quizplus · Accepted Answer

In a Cournot duopoly, firms decide on their output levels simultaneously, taking into account the other firm's output. If Firm 2 adopts a strategy that increases Firm 1's marginal cost, Firm 1 will indeed reduce its output to maximize its profit given the higher cost of production. This reduction in output by Firm 1 allows Firm 2 to gain market share, as it can now supply a larger portion of the market's demand. Consequently, with a larger market share and potentially higher sales volume at competitive prices, Firm 2 will enjoy higher profits. Therefore, all the statements are correct in the context of the Cournot duopoly model.

Firms 1 and 2 Compete in a Cournot Duopoly