An increase in firm 1'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

An increase in firm 1's marginal cost will increase their profit maximizing price, which will decrease the quantity demanded by consumers. This will lead to a lower optimal quantity for firm 1. As a result, firm 1's reaction function will shift downward, indicating they will produce less in response to any given quantity produced by firm 2. This will result in a new Cournot equilibrium where firm 1 is producing a lower quantity and firm 2 is producing a higher quantity. Therefore, the correct option is B.

An Increase in Firm 1's Marginal Cost Will Cause