Firms 1 and 2 Compete in a Cournot Duopoly

question 32

Multiple Choice

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 will reduce its output.
• B) firm 2 will gain market share.
• C) firm 2 will enjoy higher profits.
• D) All of the statements associated with this question are correct.

---

Definitions:

Marginal Cost

The augmentation in total costs associated with the production of an additional unit of a product or service.

Cartel

A group of independent market participants who collude to control prices and production in order to monopolize a market.

Fixed Cost

Costs that do not change with the level of output, such as rent or salaries.

Cartel

A formal agreement among competing firms to control prices or exclude entry of a new competitor in the market, often resulting in higher prices.