A decrease in firm 2's marginal cost will cause:
A) an upward shift in firm 1's reaction function, resulting in a new Cournot equilibrium where firm 1 is producing a higher quantity and firm 2 is producing a lower quantity.
B) a downward shift in firm 1's reaction function, resulting in a new Cournot equilibrium where firm 1 is producing a lower quantity and firm 2 is producing a higher quantity.
C) an upward shift in firm 2's reaction function, resulting in a new Cournot equilibrium where firm 1 is producing a lower quantity and firm 2 is producing a higher quantity.
D) a downward shift in firm 2's reaction function, resulting in a new Cournot equilibrium where firm 1 is producing a higher quantity and firm 2 is producing a lower quantity.

Question

Quizplus · Accepted Answer

A decrease in firm 2's marginal cost makes it more competitive, allowing it to produce more at a lower cost. This results in an upward shift in firm 2's reaction function in the Cournot model, leading to a new equilibrium where firm 1 produces less and firm 2 produces more.

A Decrease in Firm 2's Marginal Cost Will Cause