In the Cournot model, the curve that traces out the relationship between the market price and a firm's quantity when rival firms hold their outputs fixed is called a ______________.
A)reaction function
B)best response
C)residual demand curve
D)cournot equilibrium

Question

Quizplus · Accepted Answer

The curve that traces out the relationship between the market price and a firm's quantity when rival firms hold their outputs fixed is called the residual demand curve. This curve is downward-sloping and reflects the fact that a firm can sell more goods only by lowering its price, but doing so will also cause a decrease in revenue from each unit sold. It is important for each firm to consider this curve when determining its optimal quantity to produce in a Cournot equilibrium. The reaction function is the curve that shows a firm's optimal choice of quantity given the quantity of its rival, and the Cournot equilibrium is the point where the reaction functions of both firms intersect. The best response is the quantity that maximizes a firm's profit given its expectations about the output choices of its rivals. The curve that traces out the relationship between the market price and a firm's quantity when rival firms hold their outputs fixed is called a residual demand curve in the Cournot model. It represents the demand that each firm faces after taking into account the output decisions of its competitors.

In the Cournot Model, the Curve That Traces Out the Relationship