Suppose two identical firms (Firm A and Firm B) are competing in a Nash-Cournot
ID: 1173358 • Letter: S
Question
Suppose two identical firms (Firm A and Firm B) are competing in a Nash-Cournot oligopoly. Now suppose that one of the firms, Firm A, develops a strategy and practice that allows it to produce at a lower marginal cost than the other firm. That is Firm A has a cost advantage over Firm B. Which of the following is true as the firms move from the original to the new Nash-Cournot equilibrium?
A. Firm A will contract, lessen, its output to preserve its original profit amount. B. A new firm, Firm C will in all likelihood since the market is no longer stable and profits are high. C. Firm B will expand its output to make up for its cost disadvantage. D. Firm A will expand its output.Explanation / Answer
Definition: The Cournot model of oligopoly assumes that rival firms produce a homogenous product, and each attempts to maximize profits by choosing how much to produce. All firms choose output (quantity) simultaneously. The basic Cournot assumption is that each firm chooses its quantity, taking as given the quantity of its rivals. The resulting equilibrium is a Nash equilibrium in quantities, called a Cournot (Nash) equilibrium. Context: The Cournot model provides results which are of some importance to industrial economics. First of all, it can be shown that price will not in most cases equal marginal costs (see costs) and Pareto efficiency is not achieved. Moreover, the degree to which each firm
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