Both firms in a Cournot duopoly would enjoy higher profits if:
A) the firms simultaneously reduced output below the Nash equilibrium level.
B) each firm simultaneously increased output above the Nash equilibrium level.
C) one firm reduced output below the Cournot Nash equilibrium level, while the other firm continued to produce its Cournot Nash equilibrium output.
D) the firms simultaneously reduced output below the Nash equilibrium level and one firm reduced output below the Cournot Nash equilibrium level, while the other firm continued to produce its Cournot Nash equilibrium output.

Question

Quizplus · Accepted Answer

In a Cournot duopoly, firms decide on their output levels simultaneously, taking the other firm's output as given. The Nash equilibrium in this context is the point where neither firm has an incentive to unilaterally change its output because it maximizes each firm's profit given the output of the other. If both firms simultaneously reduce their output below the Nash equilibrium level, they effectively reduce the market supply, which increases the market price. This can lead to higher profits for both firms, assuming the price increase is sufficient to offset the reduction in quantity sold. This strategy resembles moving towards a more collusive outcome, where firms limit competition to increase profits.

Both Firms in a Cournot Duopoly Would Enjoy Higher Profits