The inverse demand in a Cournot duopoly is P = a − b(Q₁ + Q₂),and costs are C₁(Q₁)= c₁Q₁ and C₂(Q₂)= c₂Q₂.The government has imposed a per-unit tax of $t on each unit sold by each firm.The equilibrium output of each firm is the same as a situation where each firm's: A) demand increases by t. B) demand decreases by t. C) marginal cost increases by t. D) marginal cost decreases by t.

Question

Quizplus · Accepted Answer

The imposition of a per-unit tax of $t on each unit sold by each firm will affect the marginal cost of each firm, increasing it by t. Therefore, the equilibrium output of each firm will be the same as a situation where each firm's marginal cost increases by t. This is because in a Cournot duopoly, each firm maximizes its profit by choosing its output level based on the expected output level of its competitor. With an increase in marginal cost, the profit-maximizing output level will decrease for each firm, thus resulting in the same equilibrium output level as a situation where each firm faces an increased marginal cost of t.

The Inverse Demand in a Cournot Duopoly Is P =