An increase in firm 2's marginal cost will cause:
A) 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.
B) 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.
C) 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.
D) 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.

Question

Quizplus · Accepted Answer

An increase in firm 2's marginal cost will decrease its incentive to produce more output at any given price. Thus, it will lead to a downward shift in the reaction function of firm 2. This will result in a new Cournot equilibrium where both firms produce less output, with firm 1 potentially producing a higher quantity due to the decrease in competition from firm 2. Therefore, the correct choice is C.

An Increase in Firm 2's Marginal Cost Will Cause