Firms 1 and 2 compete in a Cournot duopoly.If firm 2 adopts a strategy that raises firm 1's marginal cost:
A)Firm 1's reaction function will shift up.
B)Firm 2's reaction function will shift up.
C)Firm 2's reaction function will shift down.
D)Firm 1's reaction function will shift down.

Question

Quizplus · Accepted Answer

Firm 2's action of raising firm 1's marginal cost will lead to a decrease in firm 1's optimal output level. This decrease will cause firm 1's reaction function to shift down. Therefore, the correct choice is D.

Firms 1 and 2 Compete in a Cournot Duopoly