Question

A decrease in firm 2's marginal cost will cause: a. an upward shift in firm l's reaction function, resulting in a new Coumot equilibrium where firm lis producing a higher quantity and fimm 2 is producing a lower quantity. b. an upward shift in firm 2's reaction function, resulting in a new Cournot equilibrium where fimm 1 is producing a lower quantity and firm 2 is producing a higher quantity. c. a downward shift in firm 1's reaction function, resulting in a new Coumot 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 Coumot equilibrium where firm 1 is producing a higher quantity and firm 2 is producing a lower quantity

Answer 1

Answer: B. an upward shift in firm 2's reaction function, resulting in a new Cournot equilibrium where fimm 1 is producing a lower quantity and firm 2 is producing a higher quantity.

Step-by-step explanation:

In a cournot model, the the firms competing are offering standardized product. Also, they choose a quantity to produce independently.

Since both the firms are offering standardized product the only option they have is to compete in non price competition.

However, if the cost of one firm increases, the other firm will have benefit in terms of quantity and profit.

In this case, since firm 2's MC is decreasing, therefore, the firm will have benefit in producing additional quantity and also offering relatively low price and hence obtaining more profit than firm 1.